In our Monthly Market Myths and Mistakes, we’ll de-mystify the stock market for you by highlighting a common myth that investors believe or mistake that investors make and hopefully help you become a better investor. News outlets and websites devoted to stock market news are rife with examples.

Here’s one I came across recently on Market Watch—an article entitled, “Why trying to avoid a bear market can be a costly mistake for stock investors.” The author claims that trying to correctly time the market is impossible and that investors trying to do so will incur significant costs. The evidence the author used to support this claim was a study from the Wells Fargo Investment Institute that shows that equities tend to see steep gains in the 12 months before a bear market. Therefore, the author concludes, getting out early would cause an investor to miss out on these gains.

First of all, yes I agree it is impossible to perfectly time the market. Investors cannot predict when the next bear market is going to occur. It is impossible to predict when the “top” of the market is going to happen. That doesn’t mean investors should just buy and hold forever though.

So what should they do? Downturns can be severe and last a long time. Exiting the market at a pre-determined point in order to avoid further declines is not just an effective strategy for avoiding carnage, it is a much more prudent strategy than simply staying invested and diversified. The key thing here is not relying on your own foresight or subjective reading of the economy, but rather using a dispassionate, data-driven process.

At Wurz Financial Services, we use a variety of indicators to dial up or dial down our equity exposure. When markets are quietly trending positively and our indicators are positive, we’ll dial our equity exposure up and maximize our gains. When markets are choppy, negative trends are developing or indicators turn negative, we’ll start pulling back to avoid any possible prolonged downturn. We feel this is a prudent approach. Want to learn more? Give us a call!

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