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Don’t Panic: Why Market Timing Doesn’t Work


The Dow, once again, is plummeting. Frightened investors are, once again, calling their advisers to ask whether they should buy, sell or just get the heck out of the market altogether.  And its amid this landscape that a new study emerges, hinting that investors should put down that phone, take a deep breath, and stick to their guns.

A study released this morning by Fidelity Investments, one of the largest administrators of 401(k) plans, shows that investors who try to time the market lose out.  401(k) participants who pulled out of the stock market from Oct. 1, 2008 to March 31, 2009, but then bought back into the market after that decline, saw an average account balance increase of 25% as of June 30, 2011. This, however, is significantly less than investors who kept their equity allocation relatively steady: These participants saw an average account balance increase of 50% during the same period. “Our analysis reinforces that during extreme market swings, it’s essential for investors not to overreact and remember that investing for retirement requires a long-term view,” writes James M. MacDonald, president of workplace investing for the company.

This Fidelity study is just another addition to a plethora of studies that show that timing the market won’t do you much good. This study by Morningstar, which examines returns over the past decade, concludes that investors who try to time the market end up with significantly smaller retirement savings than buy and hold investors. And this Vanguard study draws a similar conclusion. The authors write that the average investor “has persistently demonstrated an inability to time the market.”

Bottom line: It may be scary to watch as your stock portfolio plummets.  But you’re better off staying calm and sticking to your long-term plan, than you are making rash moves. To read more about creating a solid long-term retirement investment strategy, click here. To see if you are on track for retirement, try our new retirement calculator.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.