Investors have a fascination with predictions. Look at the financial media. Turn on any television show, listen to any radio program, or pick up any magazine, and you’ll see there’s always someone trying to predict future stock prices. It doesn’t pay to listen. As baseball legend Yogi Berra said, “It’s tough to make predictions, especially about the future.”
But the economics are simple: As long as investors believe it’s possible to predict future stock prices, others are willing to sell the information. There’s a problem though, if you’re to make predictions pay off, you must be correct not once – but twice.
If you sell shares of stock at $100 and the price falls to $95, you were right, and it looks like the timing paid off. But if the price rises to $120 in the next two months, the timing was costly. To make the timing pay off, you must be right twice – when to sell and when to get back in. Even if your market timing guru has a 70% chance of being correct, you’d have a 49% chance of being right twice. You’d be better off flipping a coin. At least you’d have a 50% chance of making the right decision – and you can get that advice for free.
No academic research has ever supported an advantage with market timing, especially after considering commissions. The research is consistent, the math reliable, and the conclusions the same. And yet, people continue to pay for advice of when to buy and sell. Take the advice, and you’ll pay the price.
So why work with a financial advisor?
To succeed with investing, the trick isn’t in trying to predict the future. It’s knowing how to handle the uncertainty of the future. Just as any good sailor will tell you: The skill isn’t in predicting whether next week will bring sun, rain, wind, or storms. The skill comes from knowing how to adjust your sails.