The Cost of Market Timing

I've come across a bunch of studies that show how costly it is to try to time the market by buying and selling stocks in the hopes of buying "low" and selling "high," and they've been very convincing. I've never come across such a clear example as what happened in my own 401(k) account not too long ago.

On September 17th of this year, the value of my 401(k) was $52,000. I had enjoyed an ok 6.6% return for the year, based on the strong performance of my international funds and the pretty good performance of my domestic equity index funds. The common stock index fund that represents 60% of my assets in that account was up 6.1% on the year.

Those of you who follow the Fed pretty closely will remember what happened on September 18th. Ben Bernanke cut the discount rate and the fed funds by 50 basis points, 25 more basis points than forecast, and the market ate it up. I posted briefly on it here.

When I checked my 401(k) balance at the end of the day on Sept. 18, it was worth about $53,330, a gain of $1,330. My return was now 10.3% on the year, as the equity index fund rose to a 10.4% return on the year (International stocks hadn't had a chance to respond to the cuts during the day so they underperformed, relatively speaking).

What a difference a day makes. If I hadn't been invested on the 18th, I would have been kicking myself. Of course, there will be days the market takes a big hit in the other direction and I would have been better off with my money in cash, but I believe the big long-term trend is higher and I'm willing to take some volatility along the way in order to build a big nest egg for my retirement. (And based on what's happening with social security, it looks like I will definitely need a big one.)

I guess the moral of the story is, yet again, don't try to time the market. You'll miss out on the big days.