History Says Investors Who Built the Most Wealth All Have This 1 Thing in Common

Let's face it. Some investors just do better than others. There are several arguable reasons why, ranging from picking better stocks to keeping their expenses low to optimizing their portfolios' allocations.

More than anything, though, the world's most successful investors don't try to do the one thing they know they can't do reliably well enough. That's timing the market.

Discouraging data

What's market timing? Simply put, it's an effort to regularly buy low and then sell high. Rather than holding periods measured in years that ride out any interim ebbs and flows, market timers aim to capitalize on those ebbs and flows by selling at peaks and buying at bottoms.

It's just tough to do well with enough consistency.

RFG Advisory's chief investment officer, Rick Wedell, dug up the historical data. Although he concedes investors make the correct exit decision roughly 60% of the time, when it comes to timing entries (or re-entries), investors are right only about 50% of the time. That's not terrible. Not great, but not terrible, either. Mathematically, it seems you'd be no worse off with this approach than simply buying and holding.

There's a flaw in that assumption, though. That is, for market-timing to work well enough, you need to correctly time the entry and the exit. Since you're only likely to do either one properly about half the time, statistically speaking, you're also only likely to do both well -- on a back-to-back basis -- around 25% to 30% of the time.

It's only anecdotal evidence, but it makes the point all the same: If you're playing the odds, your best odds come by not playing the game at all.

Image source: Getty Images.

Then there's the other thing. That's the unpredictability of the market's biggest single-day gains, and the cumulative effect of being in the market or out of the market when they materialize.

Investment manager Invesco crunched the numbers, indicating that a $100,000 investment made in the S&P 500 (SNPINDEX: ^GSPC) at the beginning of 1995 would have been worth $1.92 million by the end of last year. If you take just the market's 10 best single-day gains out of this performance during this stretch, however, your holding's net gain is nearly halved to a value of just under 855,000.

But your plan is to be out of the market when it's falling? That's not likely to work, either. As mutual fund company Hartford notes, 48% of the 50 best days for the S&P 500 between 1996 and 2025 took shape during bear markets, while another 28% materialized during just the first two months of a new bull market, when most nervous investors are still on the sidelines.

In other words, your best bet is just staying in the market even when it's uncomfortable to do so.

Just be realistic

Sure, a small handful of investors have a knack for market timing. Thinking you're one of these rare exceptions, however, is dangerous thinking. You're probably not, if only because you don't have the time or the technical tools to monitor the market as you'd need to. The investors who build the most wealth are the ones who do the least amount of tinkering and just buy and hold quality stocks through all the market's ups and downs.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.