A couple of days ago, I received an email from a subscriber who asked me what I thought about market timing. The following graphs depict exactly what I think about market timing—which is, it’s not a good idea for most investors!
“The chart below shows a hypothetical investment of $10,000 in stocks over a 20-year period. An investor who stayed invested over that time period would have made 58% more than one who missed just the five best-performing days,” according to BlackRock.
Bloomberg reports, “Over the past 30 years, missing the best 30 days (based on S&P 500 Index returns from July 1, 1995, through June 30, 2025) took the annual average return from 8.4% per year down to 2.1%, which was less than the 2.5% average inflation rate over that same period.”
Sources: Bloomberg and Wells Fargo Investment Institute. Daily data: July 1, 1995 – June 30, 2025
Listen, markets go up and down all the time. There is no way to predict when and how that happens, so if you try to “time” them, thinking you are going to buy at the lowest point and sell at the highest level, chances are, you will be dead wrong.
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Which leads me to talk about the famous stock market adage, “The October Effect.” This particular term was coined after the Black Monday stock market crash on October 19, 1987, the day the market lost more than 22%. Wall Street analysts looked back at some additional October down days, such as the Panic of 1907, Black Tuesday (1929), Black Thursday (1929), and Black Monday (1929), and decided October may be a “dangerous” month for the stock market.
It turns out that this is not factual. On average, since 1945, “The S&P 500 has returned 1.1% in October, a figure better than or equal to six other months of the year, according to analysis by CFRA Research.”
And it’s also important to note that, in most cases, the catalysts that created the big downward moves I noted above actually began before October.
For example, the 1907 panic actually occurred in March, as public confidence in trust companies declined due to no regulation. In 1929, fears started rising in February, when the Federal Reserve sharply increased interest rates and banned margin-trading loans.
And the 1987 crash was a combination of several factors that had built up over the preceding months, including:
- Rising interest rates and higher-than-expected trade deficits that pushed the U.S. dollar and stocks down.
- The 5-year bull market run was making investors antsy.
- Institutions were using a portfolio insurance hedging strategy to sell futures contracts. It flopped and caused major selling in the markets.
- Automated trading systems that initiated sell orders at specific prices prompted wholesale dumping of stocks.
As you can see, each of these catalysts did not happen overnight, but they sure did induce panic selling in the markets.
Bottom line, I know of no system that will predict the direction or time span of market declines or rises. Consequently, it pays to stay invested.
However, that doesn’t mean you shouldn’t continually monitor your individual investments. Because there are good and bad times to sell specific stocks. That’s why I always analyze the investment’s potential—before I buy it and set a price target. I also use stop-losses to mitigate any surprise movements in the stocks.
Additionally, I recommend healthy diversification in your portfolios. Believe me when I tell you that not every stock you buy will go up, and diversification will help even out your returns. So, diversify by industry and by market cap, and you’ll be a happier—and more profitable—investor.
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