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The futility of trying to time the market

Investors can't consistently beat the market. It's a theme that runs throughout my writings on investing, including retirement savings.

Why? Well, investing is the most competitive business in the world. Astronomical sums changing hands every day around the globe as millions and millions of smart investors (and many more not-so-smart ones) try to get an edge on the competition. Thanks to hordes of investors, equity researchers, mutual fund money managers, journalists, day traders, hedge fund operators, corporate treasurers, pension fund managers and other institutional investors, stock prices reflect much that is known about a company and the market.

Individual investors with day jobs, families and chores to do around the house don't have the time, the knowledge and information to play this game well.

Numerous scholarly studies have documented the same holds for professional money managers. Their performance systematically lags the main market averages, such as the Standard & Poor's 500. As Rex Sinquefield, a long-time finance maven, famously quipped: "There are three classes of people who do not believe that markets work: the Cubans, the North Koreans, and active managers." (The Cubans are opening up more to markets, so maybe in the future it may just be the two classes.)

A McKinsey & Co. chart shows that even senior management fails at market timing. You would think they could do it. But no.

After a global technology business paid about $900 million to buy back its shares in 2004, for example, it spent increasingly large sums to do so just as prices rose. When they peaked, in 2007, it devoted upward of five times more money to repurchasing shares than it had in 2004. Yet the company spent less to buy them back in 2008 and nothing in 2009 or 2010, though prices had fallen by around 50 percent and profits remained strong.

Oops. Buy high and sell low isn't the path to wealth.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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