“Time is your friend; impulse is your enemy.” - John Bogle, Vanguard Group Founder 

“History shows that in the long run a thoughtfully designed, diversified strategy of “passive” funds typically beats all but a few active managers. It’s not easy to structure and maintain such a strategy. It requires some initial research and discipline to stay the course. But it’s much easier than predicting which active managers will randomly beat this approach.” - Eugene Fama, Jr., DFA

When investing passively for the long term, it is crucial to choose a wise investment strategy and stick with this strategy. Choosing investments, asset allocations, and other aspects of a portfolio is very important, but staying the course once a strategy has been chosen in critical to long term investing success.

One of the most common and most damaging mistakes many average investors make is attempting to time the market. A classic timing mistake, is investors buying equities at a market peak and then selling equities once the price falls to purchase fixed-income investments. The influence of emotion, the media, and other outside factors cause many investors to make the mistake of buying high and selling low. After buying fixed-income investments, many of these same investors are unsure of when to reinvest in the stock market and end up buying equities at market highs again.By choosing an investment strategy and staying the course, long term investors can ride the volatility of the market and hopefully capture close to the full return. In addition, long term investing requires less effort, is more tax efficient, and is less costly then attempting to time the market by making multiple trades.

I recently found this post on the old Vanguard Diehards forum. I highly recommend the new Vanguard Diehards forum. It is an excellent resource with many knowledgeable posters.

The first two entries of the post were as follows:

1.I’m Out of the Market
Dbbeebs
September 11, 2006

I came to the conclusion last night that “I done well” so far this year. Reading several blogs has convinced me we are in a housing “popped” bubble, and that we will undergo a recession because of it. I lightened up by seventy five percent last week, and sold everything else last night.

Do I leave it in VG Prime MMF or Treasuries?
I don’t anticipate reinvesting until 2008 at
the earliest.

This average investor decided to time the market. Instead of staying the course, the investor thought that he or she was more knowledgeable than many wall street professionals and could predict the correct time to change asset allocation before a market correction or downturn.

Larry Swedroe had a great response. Swedroe has an MBA from NYU, is a principal in the firm of Buckingham Asset Management, and author of The Only Guide to a Winning Investment Strategy You Ever Need.

2.Don’t Do It
Larry Swedroe
September 11, 2006

First, no one has shown any ability to forecast economy or the market. And even if you have the economy right that doesn’t mean you get the market right. Try reading William Sherden’s Fortune Sellers before you make the mistake of reading any more such blogs. Even investors such as Peter Lynch and Buffett say that they remained fully invested at all times and Buffet’s favorite time frame is forever—you know something he does not?

Second, the market is foreword looking anyway. So if you think there is housing bubble, by the time you have figured that out, or the other gurus have figured that out, everyone knows it and market long ago put that into prices. Too late.

Third, think of all the gurus who said, back in 1994 when Fed started to tighten—that the WISDOM is don’t fight the FED and yet DESPITE 17 times raising rates the markets have provided strong returns. And long bonds did fine.

Your biggest problem if you get out is you will have big trouble getting back in. First if you are wrong and market goes up now what do you do? If you sold at even lower prices how are you going to buy at higher prices? And if market falls how will you know when to get back in? Timing the market is very dangerous game. One study on institutional investors found that NOT ONE SINGLE ONE benefited from doing so. Now are you smarter than them? Rhetorical question of course.

As you can see from the dates of the posts, the investor attempting to time the market was clearly wrong. I thought this provided an excellent real life example of the common mistake of timing the market and the dramatic negative effects timing can have on long term investment returns.

Michael Steinhardt The Concept of Variant Perception – Market Wizards

William O’Neil Art of Stock Selection - Market Wizards

In Investing, You Get What You Don’t Pay For - Speech by John Bogle

Liar’s Poker

Mark Weinstein High Percentage Trader - Market Wizards