Every now and then someone will ask me for my opinion on a particular stock or asset class. And when it comes to asset classes I mean crypto, it’s almost always crypto. After talking for a few minutes and realizing I have no hope of converting them to my investment philosophy, I say, “Wish you the best of luck. You know as they say, buy low and sell high.” Usually that gets a laugh of agreement, but upon further reflection, I realize I’m actually doing them a disservice.

The reason is that market timing is one of the many investing fallacies that can erode wealth. I like to break it down into three categories:

Panic Selling
Buy Low/Sell High
Unintentionally Out of the Market

Panic Selling can really disrupt a financial plan but is not my focus for today. I want to go over how people can quietly erode their potential net worth through market timing.

Buy Low/Sell High

Buying Low and Selling High seems intuitive, but it introduces a few challenges:

When and what to Buy?
When to Sell?
When to Buy back in? And Buy into what?

The most interesting questions to me are the first and third bullet points. What are you using your money to buy in the first place and why? If we are buying individual stocks, are we being honest with ourselves about our ability to pick a winning stock? If buying low and selling high is so easy, why do most professional active asset managers underperform their respective benchmarks?

Let’s say you buy a stock or index and successfully sell it at a high point. What next? When do you put your money back to work and into what asset? This is very important because there is an opportunity cost to being out of the market and not invested. While you’re sitting in cash, the rest of the world’s great businesses are continuing to earn profits and investors are analyzing their value.

Below is a chart from Dimensional Fund Advisors showing the growth of $1,000 if it was invested in the Russell 3000 (U.S. companies) from 2001 through 2025. If that $1,000 stayed invested during that entire period, after twenty-five years it had grown to $8,360. That’s great, but what’s striking is the lost wealth potential if our hypothetical investor simply missed the best week in those twenty-five years. If they missed the best week, their $1,000 grew to $6,977. A $1,383 difference because they missed a single week at the end of November 2008. That’s opportunity cost. And the concerning thing is you don’t even have to make an investment decision to miss one of those weeks.

Unintentionally Out of the Market

I would wager that most investors know enough not to intentionally time the market by jumping in and out of their retirement funds. But there is still a major financial event that can unintentionally take someone out of the market: 401(k) rollovers.

Let’s say on October 27th, 2023, you started a new job and during your lunch break you started to roll over your old employer’s 401(k) to a personal IRA at Charles Schwab. That Friday, the old custodian sells the funds in the account and gets ready to mail Charles Schwab a check for the balance of your account which is $1,000,000. The check takes a few business days to arrive at Charles Schwab and get deposited. Finally on Monday November 6th you log in to your IRA and place the trades to get the $1,000,000 invested.

There’s nothing out of the ordinary here. The only problem is the U.S. stock market was up 6% the week your money was in the mail and not invested in the market. If this investor was in their 50s and normally invested 80% U.S. stocks and 20% bonds, they just missed out on a $48,000 investment return. (This example uses investment returns for the Russell 3000 for the week ending November 3, 2023).

Now at HFG Trust, depending on the circumstances, we have two methods to help our clients avoid being out of the market during a roll over. We call these methods “The Two-Step.”

Version 1: Some custodians such as Vanguard and Fidelity make it relatively easy to move assets from their 401(k) platforms to their individual investor platforms. Let’s say a 401(k) is at Fidelity and you want to move it to Charles Schwab. Rather than having Fidelity’s 401(k) team send a check to Schwab, you open an IRA with Fidelity. Fidelity then liquidates the 401(k) and quickly deposits the proceeds in the Fidelity IRA. You then immediately invest the proceeds according to your strategy of, say, 60% stocks and 40% bonds. After the account is invested, you can initiate an ACAT transfer to Schwab. Stocks, ETFs, and mutual funds are still invested throughout the short transfer process so you are not out of the market as you move your account to Charles Schwab.

Version 2: Unfortunately, some 401(k) custodians are more difficult to work with. They either don’t have an individual investor side to their business, or their operations are so disconnected that it’s easier to have a check mailed. However, if you already have an outside IRA, there is still a workaround. Let’s look at an example.

Let’s say an investor has a 401(k) worth $400,000 and an IRA worth $800,000 for a total of $1.2 million. Both accounts are invested 60% in stocks and 40% in bonds. They’ve decided to change jobs and want to roll over their 401(k) to their IRA.

The only way they can roll their money over to their IRA is by having the custodian send a rollover check. When that check is in transit, they will be losing $240,000 worth of market exposure ($400,000 account balance multiplied by 60% stocks).

To work around this, they can use their IRA account to sell out of bonds and buy $240,000 worth of stocks. The IRA account is now invested $720,000 in stocks and $80,000 in bonds. However, combined with the $400,000 of rollover proceeds temporarily sitting in cash, the investor has maintained their same overall $720,000 of stock-market exposure they had before the rollover. Once the rollover arrives, the portfolio can be returned to its normal 60% stock and 40% bond allocation.

Conclusion

“Buy low and sell high” sounds like simple advice. In reality, it requires us to get several difficult decisions right. We have to know what to buy, when to sell, and perhaps most importantly, when to get back in.

But market timing isn’t always intentional. Sometimes investors end up sitting in cash simply because of how an account transfer or 401(k) rollover is processed. Either way, the market doesn’t care whether you intentionally sold or your rollover check is sitting in the mail, you’re still not invested.

That’s why I think the better goal is not to perfectly time the market, but to build a good investment strategy and stay invested in it. That means resisting the temptation to jump in and out based on what we think markets will do next, while also paying attention to the boring operational details that can unintentionally leave our money on the sidelines.

There will always be another asset or market prediction that makes “buy low and sell high” sound easy. It isn’t. Successful investing is much less exciting: know what you own, why you own it, stay disciplined, and spend as much time invested as possible.