The one big secret to stock market riches is not really a secret at all: It’s time in the market, not timing the market, that builds your wealth.

Does Stock Market Timing Work?

Unfortunately the majority of investors, including many professionals who should know better, mistakenly believe they can time the market, predicting when a stock’s price has bottomed before buying and getting out before it tops out. I have one word to describe these people: Insane!

John Bogle, the legendary founder of Vanguard, had this to say about market timing: “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”

Warren Buffet said, “The only value of stock forecasters is to make fortune-tellers look good.”

Peter Lynch added, “I can’t recall ever once having seen the name of a market timer on Forbes‘ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”

And none other than Benjamin Graham, himself, wrote, “Much as the investor would like to be able to buy at just the right time and to sell out when prices are about to fall, experience shows that he is not likely to be brilliantly successful in such efforts…”

Of course it’s human nature to crave action and jump in and out of stocks, especially when markets are rapidly rising and everyone thinks they’re investment geniuses. However it is essential to remember that in the short term, the stock market can be an extremely irrational place, rising to stratospheric heights based on collective greed and then plummeting to terrifying depths when fear takes root.

But methodically purchasing exceptional stocks at good prices while continuing to stay in the market over long periods of time is, yes, boring, but also very profitable.

Study after study has disproved the myth you can successfully time the markets. What usually ends up happening is you buy high and sell low and therefore lose money, or if you’re lucky, make some gains – but not nearly as much as if you’d followed the steady, boring advice so ardently preached by Bogle, Buffett, Lynch and Graham.

Numerous examples of the fallacy of stock market timing abound, but for a concrete example, I’ll look at the U.S. stock market from 1982 to 2005.

The average annual return for this period was 10.6%. However if the 10 best trading days over that 24 year period were missed, the average annual return would have fallen by 2.5% (for an average yearly return of 8.1%). If the 50 best trading days were missed, the average annual return would have tumbled to a mere 1.8%. And there’s no way anyone could have predicted when these days would occur.

To put it into actual numbers, a $100,000 investment at the start of 1982 returning 10.6% annually would have given you $1,122,336.40 at the end of 2005. However that same investment returning 8.1% annually would have resulted in $648,360.66 (a $474,975.74 difference). And if that wasn’t bad enough, at 1.8%, your $100,000 investment would have returned a dismal $153,442.86 (or a whopping $968,893.64 less).

The fact is, in the short term, the stock market moves unpredictably and prices can change rapidly. Jumping in and out of the market means there’s a good chance you’ll miss some of the best profit making days. It also means you’ll likely buy high and sell low because you’ll rely on your emotions to make decisions and your emotions will, if you’re like most humans, have you chasing performance.

If you’re smart and want to make money in the stock market, you’ll listen to the best investors who ever lived. You’ll listen to Warren Buffett and Benjamin Graham when they tell you it’s impossible to time the market and you won’t ignore the sage advice of Peter Lynch and John Bogle.

Charlie Munger, Warren Buffett’s long-time partner at Berkshire Hathaway, summed it up nicely when he said, “I think that one should recognize reality even when one doesn’t like it; indeed, especially when one doesn’t like it.”

So ignore the short-term hype and noise that so many investors buy into and concentrate on implementing the basics. You’ll come out far ahead of everyone else when it’s time to cash out.

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