What is the biggest risk of investing?

You probably think it's being in the market when the market crashes. You're wrong.

Long-time subscribers to my newsletter, DRIP Investor, are well aware of my aversion to dumping shares based on short-term market timing. One reason I avoid selling is that when you sell stock, you are guaranteed of incurring two things that are detrimental to portfolio performance -- brokerage commissions and tax liabilities. Also, trading stocks limits your ability to hit the 'home run,' to ride a stock that rises ten- or twentyfold.

But perhaps the biggest impact selling stock has on a portfolio is that it takes your money out of circulation. When you sell stock, you have to figure out what to do with the money, which usually means your funds stay out of the market for some period of time. This is especially the case if you sell shares in anticipation of or during market downswings.

Unfortunately, sitting on the sidelines is often a recipe for disaster.

I came across the following study in Investor's Business Daily recently which provides an interesting angle on the notion of timing the market. The study looked at the difference in investment returns achieved by an individual who invested $1,000 in the Dow Jones Industrials at the market high in each of the past 20 years versus an individual who invested $1,000 in the Dow at the market low every year over the same period. What the study found was that if you would have invested at the market high every year, you would have earned roughly 80% of what you would have had with perfect timing (buying at the low every year).

Thus, the reward for perfect market timing every year for 20 years was just 20%.

The study concluded, 'The biggest mistake would have been not to invest at all.' Unfortunately, being out of the market is usually what happens when investors sell stocks in hopes of buying them back at market lows.

Nobody knows for sure whether the current market weakness has run its course. Certainly the last several years of investment prosperity, sooner or later, will give way to an extended period of either downward or sideways trading. However, what we do know is the following -- Corporate earnings, which are ultimately the most important long-term driver of stock prices, may likely be higher five, 10, and 15 years from now. Higher corporate profits can mean higher stock prices over time. Your odds of benefiting from this rise in stock prices will be a whole lot better if you refuse to play the 'trading game' and instead invest regularly in your investments.