Why We Do Not Time the Market: The Evidence in Plain Terms

Key takeaways

The market's best days cluster inside its worst periods; an investor who missed the ten best days over the past few decades gave up roughly half the total return.
Professional tactical allocation funds, whose whole job is timing, have trailed simple balanced portfolios over nearly every long period measured.
Fund flow data shows investors as a group buy after rises and sell after declines, and the gap between fund returns and investor returns is the cost.
Rules that adjust the portfolio to the plan, such as rebalancing, tax-loss harvesting, and withdrawal guardrails, capture most of what timing promises without the forecast.

Market timing is the belief that you can figure out, in advance, when to be out of the market and when to be in. It's the most intuitive idea in investing. It's attempted constantly by people who'd never call themselves market timers. And it doesn't work reliably for anyone. We hold that position not as a philosophy but as a reading of the evidence, which is unusually consistent. So let's walk through it.

The best days are inside the worst periods

The most cited statistic is also the most important one. Over long periods, a large share of the stock market's total return comes from a small number of days, and those days sit disproportionately in the middle of bear markets and right after their bottoms. Studies of the S&P 500 over the past several decades consistently find that missing the ten best days cuts the total return roughly in half, and missing the twenty or thirty best days brings it close to zero. The best days of 2008, 2009, and 2020 all landed within weeks of the worst.

The point isn't that you'll miss exactly the best days. It's that being out of the market during a period of fear, which is exactly when timers are out, means missing the days that repair the damage. You can only see the bottom afterward. The days right after it are the ones that matter.

Professionals can't do it either

Tactical asset allocation funds exist to time the market: they shift between stocks, bonds, and cash based on the managers' outlook. Morningstar has tracked the category for years, and every report says the same thing. The average tactical fund trails a simple 60/40 balanced index over three, five, ten, and fifteen years, with more risk along the way. These managers are well-resourced, full-time, and paid to be right, and the category as a whole hasn't been. Hedge funds, with even more resources, show the same pattern against simple benchmarks over long periods. Newsletters and strategists have been studied for decades. Same result.

If professionals with every advantage can't time reliably, someone with a news feed and a hunch shouldn't expect to.

The two decisions

Timing means being right twice: when to get out and when to get back in. Getting out is easy, because fear hands you the signal. Getting back in is hard, because the recovery starts before the news improves. Investors who sold in March 2020 had to buy back into a market rising through a pandemic, which few did until it was well above where they sold. Investors who sold in late 2008 sat through the March 2009 bottom and the 60% rally that followed before the economy looked safe again. The second decision is where the strategy falls apart, and it falls apart even for people who nailed the first one.

What investors actually do

Morningstar's "Mind the Gap" studies compare fund returns to the returns investors actually earned in those funds, weighted by when the money came in and went out. Investors as a group have earned meaningfully less than the funds they owned, on the order of one percentage point a year or more over ten-year periods, and the gap is widest in volatile funds and during volatile periods. The cause is timing. Money arrives after gains and leaves after losses. Industry-level fund flow data shows the same thing, with the biggest outflows from stock funds reliably showing up near market lows.

What about valuations?

The sophisticated version of timing uses valuation: sell when the market is expensive by some measure, buy when it's cheap. Valuations do predict long-run returns to a degree, which is useful for setting expectations. They don't predict when. The U.S. market has been "expensive" by historical measures for most of the past fifteen years while roughly quadrupling. Anyone who waited for the cyclically adjusted price-to-earnings ratio to return to its long-run average would still be waiting. Valuation belongs in a plan's expected return assumptions. It doesn't belong in a switch.

What captures the benefit without the forecast

The appeal of timing is that it promises to buy low and sell high. Several rules do that mechanically, with no forecast required, and they're what we use.

Rebalancing. When stocks fall, the portfolio drifts below its target and the rule buys; when they rise, it sells. That's buying low and selling high, driven by the portfolio's own weights rather than an opinion about the future. The rebalancing post covers the mechanics.

Tax-loss harvesting. A decline gets used to realize losses, which offset gains and income, while market exposure stays in place through a replacement fund. The decline produces a tax asset instead of a sale.

Spending guardrails. For retirees, withdrawal rules that trim spending after a large decline and raise it after a recovery adjust to markets without moving the portfolio.

Bonds sized to your spending. Enough high-quality bonds to cover several years of retirement withdrawals means a decline doesn't force stock sales to pay the bills, which removes the main reason people want to time in the first place.

An allocation you can hold. The best defense against timing is a portfolio built so that its worst plausible year is survivable. If you'd sell after a 30% decline, you shouldn't own a portfolio that can fall 30%. The evidence-based approach sets the allocation from the plan, not from the outlook.

What we do instead

We don't forecast markets, and we don't change client portfolios because of what we or anyone else expects the market to do next quarter. The allocation is set by the plan, held through the cycle, rebalanced by rule, and harvested for losses when the opportunity shows up. Clients who want to act during a decline get shown what the rules are already doing for them. That's the whole of our investment management position on timing, and it's the one the evidence supports.

Frequently asked questions

What about getting out before an obvious crash?

Crashes are obvious afterward. In the moment, every decline looks like it might be the big one, and most aren't. An investor who exits at every plausible crash will miss most of the market's return waiting for the few that actually happen.

Is holding cash during uncertainty the same as timing?

If the cash is part of the plan (a reserve for spending or a known purchase), no. If it's money that belongs in the portfolio and is sitting out because of the outlook, yes. The cost is the return you gave up waiting for a clarity that never arrives on schedule.

Should I delay investing a lump sum until the market settles?

The research on lump sum versus dollar-cost averaging finds that investing immediately wins about two-thirds of the time, because markets rise more often than they fall. Averaging in over six to twelve months is a reasonable behavioral compromise for someone who otherwise wouldn't invest at all.

Do you ever change the allocation?

When the client's situation changes: a retirement date, a windfall, a change in spending needs or risk capacity. Not when the market changes.

Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph

This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.