Why Trying to Time the Market Usually Backfires
Market timing feels rational in the moment, but the evidence consistently points in the other direction. Missing just a handful of the market's strongest recovery days can meaningfully reduce long-term portfolio growth, and even professional fund managers rarely get the timing right consistently.
This article draws on insights from Tim Borody's Your Life and Money podcast to explain why a disciplined, plan-first approach tends to serve investors better than reactive decision-making during volatile periods.
Key takeaways:
Markets often price in news before most investors act on it
Timing the exit is only half the problem; you also have to time the re-entry
Transaction costs and tax consequences can quietly erode reactive strategies
A financial plan acts as a roadmap when conditions get uncertain
Does Market Timing Actually Work?
Consistently timing the market is rarely achievable, even for professionals. Professional fund managers who monitor markets full-time do not get it right every time, and for individual investors acting on news or emotion, the odds are even less favourable. The challenge is not just knowing when to get out, but knowing exactly when to get back in.
Why Is Re-Entry Just as Hard as the Exit?
Getting the timing right on both sides of a trade is exceptionally difficult. The COVID-19 market recovery in 2020 is a useful example: the rebound was sharp and sudden, and investors who moved to cash during the downturn often missed the early, fastest days of the recovery.
Similarly, during 2022, markets experienced multiple short-term bounces before finding a floor, making re-entry timing genuinely unpredictable.
If you exit near the bottom and wait for a signal to return, you may be re-entering on the way back up, effectively locking in a loss and then buying at a higher price.
What Happens When You Miss Key Recovery Days?
Missing even a small number of the market's strongest days can have a material impact on long-term portfolio health. Research consistently shows that a significant portion of annual returns can be concentrated in just a few high-performing days. Sitting in cash during those sessions, waiting for a cleaner entry point, can leave a lasting gap in overall returns that is difficult to close.
This is similar to walking off a golf course mid-round after a bad hole. The birdie on the next hole does not happen if you have already left.
What Are the Hidden Costs of Reactive Investing?
Transaction costs and tax implications are two factors that often go unconsidered during emotionally driven decisions. Selling out of a portfolio and repurchasing positions generates fees on both sides of the trade. Beyond that, depending on the account type, selling can trigger capital gains, and certain repurchase timelines may create what the Canada Revenue Agency calls a superficial loss, which affects how that loss can be applied.
These costs accumulate quickly, particularly for investors who move in and out of the market repeatedly during periods of volatility.
| Reactive Action | Potential Hidden Cost |
| Full portfolio sale | Transaction fees on exit |
| Repurchasing positions | Transaction fees on re-entry |
| Selling in a non-registered account | Capital gains tax triggered |
| Repurchasing within 30 days | Potential superficial loss rule |
| Holding cash long-term | Purchasing power erosion from inflation |
How Does a Financial Plan Help During Volatility?
A financial plan serves as a roadmap in uncertain times. It does not eliminate volatility, but it provides a framework for making decisions aligned with long-term goals rather than short-term sentiment. When markets drop and headlines grow louder, having a documented plan makes it easier to distinguish between a tactical adjustment and a reactive decision driven by anxiety.
Long-term investing is not about ignoring risk. It is about understanding which risks are part of the plan and which are worth responding to.
Why Does Dollar-Cost Averaging Outperform Timing?
Dollar-cost averaging, the practice of contributing regularly regardless of market conditions, reduces the pressure to predict entry points. By investing consistently, you naturally purchase more units when prices are lower and fewer when prices are higher, without having to make a call on where the market is heading.
Ongoing contributions during a market downturn can actually work in your favour over time, provided the underlying strategy and asset allocation remain appropriate for your goals and timeline.
Read more: Why Financial Planning Starts With Knowing What You’re Building
Is Staying in Cash During a Downturn a Safe Strategy?
Holding cash protects nominal value but does not protect purchasing power. During periods of elevated inflation, money sitting in a low-yield account gradually loses its real-world buying power. For Canadians dealing with higher costs of living in recent years, this is a concrete and relevant risk.
If moving to a more conservative position feels appropriate given your circumstances, the goal is to find options that offer some degree of protection without fully stepping away from potential growth. That decision is best made with a clear picture of your timeline, income needs, and existing plan.
The Caddie Principle: Why Working With an Advisor Matters
Working with afinancial advisor during volatile markets functions much like having a caddie on a difficult golf course. A caddie does not swing the club, but they provide course knowledge, help read the conditions, and offer an objective perspective when a player's confidence wavers.
An advisor brings that same grounding role. They have seen market downturns before, they understand the mechanics of recovery, and they can help separate emotional responses from informed decisions. When you are watching your portfolio decline and the instinct is to act immediately, having someone who can walk through the practical implications, including costs, tax effects, and plan alignment, can make a meaningful difference.
Read more: Why Having the Right Team Around You Matters More Than You Think
What Actually Works Better Than Timing the Market?
Consistency, plan adherence, and periodic rebalancing tend to produce more stable long-term outcomes than reactive strategies.Financial discipline is not glamorous, but it is one of the more reliable tools available to investors.
A practical approach during volatile markets might include:
Continuing regular contributions through a downturn
Using a correction as an opportunity to rebalance toward your target asset allocation
Reviewing whether your current risk profile still reflects your actual comfort level
Avoiding decisions made primarily in response to short-term news
Staying invested does not mean staying in exactly the same positions. It means maintaining an appropriate allocation and continuing to move toward your long-term goals, even when conditions feel uncomfortable.
Read more: How to Evaluate if You're Financially on Track
Frequently Asked Questions
What is market timing, and why is it considered risky? Market timing refers to moving in and out of investments based on predictions about price direction. It is considered risky because it requires two correct decisions, when to exit and when to re-enter, and the consequences of getting either wrong can reduce long-term returns more than a steady, invested approach.
How much impact can missing a few recovery days have on my portfolio? Studies consistently show that missing a small number of the market's strongest days, sometimes as few as three to five sessions in a given year, can significantly reduce overall portfolio performance. Because those days are unpredictable, staying invested through volatility is generally the more reliable strategy.
Should I move to cash when markets are falling? Moving entirely to cash can protect short-term value but introduces other risks, including the challenge of timing re-entry and the gradual erosion of purchasing power through inflation. A more measured approach, informed by your financial plan and risk tolerance, is typically more appropriate than a full exit.
What is dollar-cost averaging, and how does it help? Dollar-cost averaging means contributing a set amount to your investments at regular intervals, regardless of market conditions. Over time, this approach reduces the risk of investing a large sum at an unfavourable time and removes the pressure of trying to predict the best entry point.
What are superficial losses, and why do they matter? A superficial loss occurs when you sell a security at a loss and repurchase the same or an identical security within 30 days before or after the sale. The Canada Revenue Agency may disallow that loss for tax purposes. This is one of the less obvious consequences of reactive selling that is worth understanding before acting.
Market volatility is part of long-term investing, not an exception to it. Like a golfer navigating a difficult round at Augusta, the goal is not a perfect score on every hole. It is finishing with a strategy intact and a scorecard that reflects the overall plan. Working with a financial advisor, staying consistent, and keeping your long-term objectives in focus tend to serve investors better than reacting to conditions you cannot control.
Advice First works with Canadians to build life-centred financial plans designed to hold up through changing conditions. To hear Tim Borody discuss these ideas in more depth, including the connection between market volatility and the 2026 Masters, you can listen to the full episode here
All comments are of a general nature and should not be relied upon as individual advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning.
