The S&P 500’s total return for 2025 is currently around 17%, following 25% in 2024 and 27% in 2023. Especially with all this AI bubble-talk, it does not feel like a stretch to suggest these returns are unlikely to last. So why not sell now and “lock in” these gains?
The investor Peter Lynch provides a timeless answer in an interview in Worth magazine from September 1995: “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” We agree. But why?
First, getting the forecast right is not easy. Consider the concern du jour—and it’s a valid one—that an AI-related bubble has propped up the market. Share prices are too high! Maybe. Anxious investors at the end of each of the prior two years might have had similar thoughts. Let’s lighten up a little, take some chips off the table—surely, Nvidia cannot rise any higher. After all, professional forecasters had predicted a recession with 60% likelihood in some cases. You see my point.
As to the year ahead, according to MarketWatch, the consensus on Wall Street for the U.S. stock market return is +10%. Analysts project robust earnings on the back of a more accommodative Federal Reserve (rate cuts), AI spending, and fiscal stimulus in the One Big Beautiful Bill Act. That’s a reasonable base case—though it probably won’t work out that way. Often it is unanticipated events that dominate returns and make these sorts of forecasts look cute.
Second, getting the timing right is really hard, and you have to do it on the exit and the re-entry as well. In a world where, historically at least, the strongest returns are clustered around a small number of days, staying invested is the best way to make sure you capture them. Maybe those anxious investors at the end of last year will end up being right, but they were too early. The third thing, and this can be the real kicker, is that every day you are out of the market you miss out on the magic of compounding—or at least do so at a different, potentially lower, rate (e.g. the money market yield if that is where you moved your money).
But let’s try some market timing and see what happens.
As seen in the chart, we ran an experiment based on simple rules. Sell whenever the S&P 500 index’s price relative to estimated earnings, the “Forward P/E”, increases substantially above its three-year average and buy when the P/E returned to just moderately above the average. The shaded areas show the time out of the market when “prices look stretched” according to the P/E signal (and here we have at least given the market-timing investor money-market returns).
The result: total returns for the market timer are nowhere near the buy-and-hold investor. This is a messy example, as so much depends on what happened over the sample period and the rules you might use to assess whether prices are high (high relative what?). A different experiment could see the market-timer “winning.” But the point for us is that you have to get a lot right for market timing to work. And if you don’t, every day out of market means you could miss out on the big up days and on compounding.
So, if we can’t time the market, what can we do? Our suggestion is to time your financial needs instead. After all, this money we have invested in financial markets is usually for something. The main tool here is asset allocation. While every situation is different, if it’s a near-term need, better to have that money carved out in cash or bonds. Savings for the longer-term can be ventured in stocks where we don’t worry so much about annual fluctuations. This year has been a case in point—from where the S&P 500 opened the year, the index has fluctuated between -18% and +18%. Near-term needs have no business contending with that kind of volatility.
Of course, for stocks to work in the long run, we rely on the assumption that they will provide the returns we are looking for, as they have done historically. We do this knowing the future will be different. Stocks are risky. And to be rewarded for that risk, we recommend staying diversified, including globally, and staying invested.
