Finance PAINLESS EYE INJECTIONS treating Macular Degeneration Diabetic Retinopathy & other diseases of the eye (239) 324-4888 Toll Free (855)MALKANI Sunil M. Malkani, M.D. Retina Specialist & Surgeon 3 Convenient Locations Naples Fort Myers Port Charlotte www.mrcmd.com SunilM.Malkani,M.D. *Will provide paperwork for your insurance How likely are market timers to miss exactly the 10/20/30 best days over a 15-year period? Probably pretty low. But you get the general argument. You can’t know exactly when the market is going to have a great day. But the more days you’re out of the market – particularly after an extended downturn – the more likely you are to miss one or more of those days. And you don’t have to miss a whole lot of them to have a big impact on your overall returns. Keep inmind that the study above examined the broad-based U.S. equity market. Similar studies have been done in Canada and other developed markets, as well as emerging markets. If anything, the risks of missing out of top-performing days are even more pronounced. Understanding the costs of market timing Despite all of the sometimes overwhelming evidence, market timing does pay off for some investors. Professionals and day traders can often mitigate the costs of timing in such a way that it turns out to be profitable to some degree. But for the average “retail” investor, the costs of market timing almost always outweigh the potential benefit of shifting in and out of the market. Those costs include: Opportunity costs We’ve discussed above the research that shows the negative impact of missing a given number of days in the market – that represents the cost of a missed opportunity, the loss of a gain you could have had if you hadn’t decided to exit the market altogether. Miss a few of those great market days, and you could be a whole lot worse off than if you had simply ridden out the storm. Transaction costs Unless you’re a large institutional trader (spoiler alert: you’re not), moving in and out of investments is going to cost you. How much? That depends on the fee schedule of your wealth advisor or broker. While the cost of any one transaction is probably not all that much, the more you shuffle your assets from one investment to the next, the more those costs add up. Over time, those costs could be a significant drag on your portfolio’s performance. Taxation costs Buying low and selling high, if done successfully, will generate good returns. But make no mistake: it generates taxes as well. Unless you’re buying and selling in a registered account (RRSP, RRIF, TFSA, etc.), you’ll have to pay the taxman a percentage of your gains. Not a big deal if you have enough cash on hand, but if you’re simply “recycling” your profits inside your investment account (i.e. you’re not taking cash out of your account once you book those profits), it could present a bit of a cash crunch come tax time. “Lost sleep” costs Perhaps the most significant cost of market timing has nothing to do with your pocketbook. Rather, it has to do with the stress and anxiety that often accompanies timing strategies. Central to market timing is to be constantly monitoring the market, studying its moves, keeping up with market indicators and economic data and watching the portfolio. Such an effort takes a considerable investment of time and attention, and a good deal of stress management skills as well. Professionals have no problem making such an investment – that’s what they get paid to do. But for the typical snowbird, it’s more work than they’re really looking for at this stage in their lives. The “costs” of such emotions don’t always show up on the bottom line, but they’re still important to consider. CSANews | WINTER 2017 | 35
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