I just read a great article by Felix Salmon at Reuters and it got me thinking. He’s one of my favorite bloggers and I’ve been a fan since his days at Portfolio.
I’m not a conspiracy theorist, generally speaking. However, there is one piece of misleading information about investing that is a complete disservice to investors. There are lots of myths along the lines of “If it doesn’t fit, you must acquit” logic. The one on investing about “you can’t time the market” is one of them.
My guess is it started with the mutual funds companies b/c they are the ones who gain. Even if you’re getting charged 28 bps per year, they can’t charge you for managing cash. Another reason they tell you that “buy and hold” is the only way to go.
To prove to you that timing doesn’t work, you’re shown various scenarios where “if you missed the X best days in the market, your rate of return would have been Y%,” something like this chart below from Paul Gire’s article in the Financial Planning Journal:
The fact is, if you missed the 10 WORST days, your RoR jumps to an astounding 24.17%.
Even if you’re a long-only investor in mutual funds (the true weapons of mass destruction), this can be achieved by having Stop Orders or liquidation points entered at all times.