Why Timing the Market Rarely Works, and What to Do Instead

August 1, 2022

Lately, high inflation, shaky markets, and a looming recession seem to be unavoidable topics when watching the news, browsing the internet, and even in conversation with friends.1 

As an investor, all this negativity may have you questioning whether you should sell everything and hold your assets in cash until things settle down. While this reaction may be understandable, it’s usually not in your best interest to do so. 

Here’s why timing the market rarely works and strategies that may be better than throwing in the towel on your investments.

Some recession perspective

While fear-mongers may try to draw a picture that all recessions are like the Great Recession, the truth is that most recessions tend to be relatively short-lived. In fact, recessions have lasted an average of just 11.1 months since World War II.2 

Regarding investment portfolios, the average time it takes the market to hit bottom from its peak is 12 months, with a full recovery in an average of 21 months.3 And in less than two years, all investment losses are typically replaced. In the context of investment time horizons, that is a relatively short timeline. 

If you’re worried about that timing, ask yourself what portion of your investments are dedicated to a goal or expenditure with a time horizon of less than two or three years. For most investors, it’s likely a small portion of total holdings, which may already be in low-risk assets. 

Why timing the market doesn’t usually work 

You might be tempted to consider selling your long-term investments to avoid the decline altogether and reinvesting before the recovery. But unfortunately, this strategy can be more challenging than it sounds. This is because it’s nearly impossible to determine when the market has officially hit bottom and when it will reverse course.

Keep in mind that to time the market, you have to get the timing right twice — when you sell and when you buy back in — a highly unlikely feat. 

Therefore, you can miss out on potential gains if you sell your investments out of fear that the market will fall, only to have guessed incorrectly. The more likely scenario is that you’ll sell to avoid further losses and end up buying back in at a higher level and locking in your losses. Instead, if you left the money invested, those losses could have become gains.

According to market analysis by J.P. Morgan Chase, as of the end of 2021, seven of the best days for the S&P 500 occurred within two weeks of their corresponding worst day. But sometimes, the spread was much closer than that. For example, March 12, 2020, the second-worst day of the year, was immediately followed by the second-best day of the year. Sudden rebounds like this make it extremely challenging to reinvest in time to benefit from the best day that may follow.4 

Here’s a look at what could happen if you were to exit the market and miss the best days.

J.P. Morgan Asset Management analysis using data from Bloomberg.
Source: J.P. Morgan Asset Management analysis using data from Bloomberg.

Moving to cash could cost you 

Cash certainly has a place in a sound investment strategy and diversified portfolio — especially in times of volatility. You’ll want to confirm you have enough set aside for necessities and an emergency fund. However, having too much cash on the sidelines could actually cause you to lose money. This is because savings account rates are typically minimal and won’t outpace inflation — especially when inflation is high. For instance, if your savings account offers a 1% interest rate, but inflation is 9%, then your money’s value is deteriorating by 8% over that time. 

In addition, when people leave the market and move to all cash, oftentimes, they simply don’t get back in, even when the tide turns. Staying in cash out of fear, these individuals may miss out on years of significant gains.

Then, once the market hits new highs, they may be afraid to invest because of those highs and are worried about the next crash. It’s a vicious cycle that may be best to avoid by making calm and fact-based decisions rather than emotional ones.

Of course, there is always risk when investing; however, a well-diversified portfolio that aligns with your risk tolerance and time horizon is usually the key for longer-term goals. 

Investment strategies that may work better

Here are some general guidelines you may wish to follow to have a more tempered reaction to the threat of a recession and market volatility as a whole. 

  1. Stick to your financial plan. When the markets are volatile, it’s worthwhile to review your strategy and confirm you are still on track. Doing so can help ensure your investments remain aligned with your financial objectives.
  2. Base your investment strategy on your risk tolerance. Review your risk tolerance during difficult markets to determine if you’re out of your comfort zone. If your decisions are giving you cause for concern, then consider gradually reallocating a portion of your money into lower-risk assets.
  3. Don’t make emotional investment decisions. Have investing rules you can follow during difficult times, so your emotions don’t get the best of you. For example, you might tolerate losing 10% of your portfolio but not 15%. In that case, have a rule to adjust your portfolio allocation only once you are down more than 10%. Doing so will ensure your decisions are based on a system rather than fear or gut feelings.
  4. Invest early and stay invested. Charles Schwab recently conducted a study that illustrated how effective this strategy is. They assumed an investment of $2,000 per year for 20 years and compared five different investment approaches and their impact on the ending level of wealth. Investing immediately and remaining invested was the second-best strategy, outperformed only by perfect market timing, which is only possible with hindsight. It also resulted in three times the ending wealth compared to staying in cash.5
Charles Schwab
Source: Charles Schwab

How a financial advisor can help 

During times of volatility, having a financial advisor on your side can be especially helpful. We are accustomed to how market changes can impact even the most diverse portfolios and can assist you in navigating them accordingly. 

It’s not always about the numbers, spreadsheets, and markets. Having a professional to talk to who understands your goals and concerns can be a tremendous asset during stressful times. 

At Trinity Wealth Management, we understand that investing in light of a potential recession can be concerning, but we also believe it can be done responsibly. Reach out to our team to learn more about how our financial advisors can help you navigate the current market. 


1.Goldman CEO David Solomon says inflation is ‘deeply entrenched’ in the global economy,” CNBC
2.Recessions: 10 Facts You Must Know,” Kiplinger
3.How Long Does it Take For Stocks to Bottom in a Bear Market?” A Wealth of Common Sense
4.Is market timing worth it during periods of intense volatility?” JP Morgan Chase
5.Does Market Timing Work?” Charles Schwab

Live The Life You Want To Live