Why "Timing the Market" Rarely Works

An educational piece grounded in data and behavior

By Laura Fitzgerald

Every investor has felt the temptation: sell before the crash, buy back in at the bottom, and pocket the difference. It sounds simple. The problem? Decades of data show that trying to time the market is one of the most reliable ways to underperform it.

The Numbers Don't Lie

The 2025 DALBAR Quantitative Analysis of Investor Behavior delivers a sobering reality check. While the S&P 500 returned 25.05% in 2024, the average equity investor earned just 16.54%, an 848 basis point gap representing the fourth-largest underperformance since DALBAR began tracking investor behavior in 1985.

This wasn't a one-year fluke. Average investors have now underperformed the S&P 500 for 15 consecutive years, with 2009 being the last time they beat the index. Over a 20-year period ending December 2024, the average equity investor returned 9.24% annually compared to the S&P 500's 10.35%.

That seemingly small 1% annual difference? On a $100,000 investment, it's the difference between having $717,503 after twenty years versus just $345,614 costing yourself more than half your potential gains through poor timing decisions.

The Best and Worst Days Come Together

Wells Fargo Investment Institute analyzed 30 years of S&P 500 data and found something crucial: the market's best days historically cluster in the midst of bear markets and recessions, precisely when volatility is highest and investors are most tempted to sell.

Translation: if you exit the market to avoid the worst days, you'll almost certainly miss the best days too, because they often occur close together. Analysis from July 1995 through June 2025 shows that missing just the best week could shrink a hypothetical $1,000 investment from $6,356 to $5,304. Miss the three best months, and your return dwindles to $4,480.

The cruel irony is that while you're sitting in cash trying to "wait for clarity," the market often stages its sharpest rebounds. Research consistently shows there is no reliable process to invest on the best market days and then accurately move to the sidelines to avoid the worst ones.

Why Smart People Keep Getting It Wrong

DALBAR identifies several behavioral traps that sink investor returns. In 2024, withdrawals from equity funds occurred every single quarter, with the largest outflows happening in the third quarter right before a major rally. This pattern has persisted for years.

The firm tracks a "Guess Right Ratio" how often investors correctly time their cash flows. In 2024, this ratio fell to just 25%, meaning investors guessed correctly about market direction only one quarter of the time. Even a single poorly-timed decision can erase months of gains.

Common behavioral mistakes include loss aversion (the pain of losses feels twice as strong as the pleasure of gains), anchoring to past experiences, overreacting to headlines, and herding behavior, copying what everyone else is doing just as the opportunity disappears.

DALBAR found that investors suffer from what psychologists call optimism bias: the belief that good things happen to them while bad things happen to other people. This leads to overconfidence during rallies and panic during corrections, both guaranteed to hurt returns.

The Complexity Trap

Morningstar research shows that the more complicated, volatile, or trendy an investment is, the wider the performance gap grows. High-turnover funds, sector-specific investments, and whatever's currently hot all tempt investors to trade frequently. And the more they trade, the worse they do.

Analysis across mutual funds and ETFs shows that over the past decade, investors earned 7.0% annually while the funds themselves returned 8.2%, a 1.2 percentage point gap representing roughly 15% of total returns left on the table through poor timing.

What Actually Works

The evidence overwhelmingly supports a simple truth: time in the market beats timing the market. Since World War II, stock markets have fallen 20% or more on average every six years. Market volatility isn't an exception, it's the norm.

The most successful investors aren't those with the best market predictions. They're the ones who maintain discipline through volatility, automate their investments to remove emotional decision-making, and resist the urge to make dramatic changes based on headlines or short-term performance.

The Bottom Line

Market timing fails not because it's theoretically impossible but because humans are terrible at it. We sell when fear peaks and buy when optimism runs high exactly backward. We think we're being smart and strategic when we're actually being predictably emotional. 

The data spanning 40 years and millions of investors tells the same story: the attempt to outsmart the market through timing consistently destroys wealth. The most valuable investment skill isn't predicting what markets will do next. It's having the discipline to stay invested when every instinct screams otherwise.