Market Timing Works… Just Not For You

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Market timing works.

The basic idea behind market timing is that you want to pick your spots, buy low and sell high. There are software programs that will automatically trade for you and there are firms, like Tradebot, who have not had a single losing day in four years. Tradebot typically holds a stock for 11 seconds and hasn’t lost a penny on a single day in four years. Four years.

Don’t give me the usual crap about market timing not working. It works.

The problem is that it won’t work for you because you don’t have a big pile of money to trade with, you don’t have nearly as much knowledge, and you don’t have a magic money machine software package. Without all three of those pieces, market timing doesn’t work and you should follow fish like me to the index fund promised land.


One critical idea you need to understand about market timing, and day trading, is that it’s essentially gambling. You want to be able to identify situations where your investment has the highest probability of generating a profit and then put it in play as often as you can. Whether you win or lose a particular bet is irrelevant, it’s the system and the frequency of your bets that matter. That’s why high frequency traders, those who hold stocks for 11 seconds, can win. They have a pile of money, they know the odds, and they play them over and over and over again.

In Bringing Down the House, the story of the MIT Blackjack team, it’s obvious that the system was the crucial element. When you want to time the market, you need to know when to do it and then do it frequently.

Don’t Forget!

Hewitt put out a report, based on the 401(k) plans they managed, that said:

Hewitt’s annual study of the 401(k) saving and investing behaviors of nearly 3 million employees across 120 large-sized companies reveals that despite the market volatility, only 16.2 percent of employees made any sort of fund transfer in 2009, down more than 3 percentage points from 19.6 percent in 2008. In addition, participation rates and contribution rates remained virtually unchanged from 2008, at about 74 percent and 7.3 percent, respectively.

In other words, people go out of the market in 2008 and many never went back in. They tried to time the market by pulling out funds or reducing and eliminating their contributions, but they didn’t get back into the market in time for the rally in 2009.

You need to time it on the way out and you need to time it on the way back in. Miss one or the other and you lose.

Burton Malkiel @ Google

Burton Malkiel gave a talk at Google that’s worth watching, he discusses day trading:

The takeaway is this – Market timing works, it just doesn’t work for regular folks like you or me.

{ 18 comments, please add your thoughts now! }

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18 Responses to “Market Timing Works… Just Not For You”

  1. BankVibe says:

    I didn’t know there were such things as “magic money machine software packages.” I’d love to get my hands on one of those 🙂

    Day Trading is for thrill seekers and being a thrill seeker I can say from experience it can work and it can backfire. Just like everything in life, TIMING is the critical element.

  2. Scott says:

    Jim, you got any freebie coupon codes for Tradebot? 😉

  3. cubiclegeoff says:

    And as with gambling, anyone can do it and get lucky, but eventually your luck will run out when the house has the advantage.

  4. DIY Investor says:

    You’re exactly right. Individuals should forget market timing. Learning to invest by using well diversified, low-cost, low-turnover, index funds is the way to go.
    As for Tradebot,it is the next accident waiting to happen. We’ve seen it all before with portfolio insurance, value-at-risk (VAR) models ala’ Long Term Capital Management, and the packaging and slicing and dicing of sub prime mortgages. Here’s the news: there’s no golden goose out there.
    Keynes was right when he said the country is in trouble when the capital markets become a giant gambling casino.

  5. zapeta says:

    As an individual investor, I just picked an asset allocation and put money in for the long term. I have neither the time or resources to try to time the market.

  6. Rob Bennett says:

    It depends on what kind of market timing you are talking about.

    If you are talking about short-term market timing (changing your stock allocation with the expectation that you will see a benefit for doing so within a year or two), I agree with what you say here.

    If you are talking about long-term market timing (changing your stock allocation in response to big price changes with the understanding that you may not see a benefit for as long as 10 years), I do not agree. The key to successful investing is getting your stock allocation right and the stock allocation that is right when prices are at fair value obviously cannot also be right when prices are at insanely overvalued levels.

    I would say that it is gambling not to engage in long-term market timing. The historical record (going back to 1870) shows that there has never yet been a time that long-term timing did not work and that sticking with the same stock allocation when prices go to insanely dangerous levels always leads to huge losses.


    • daenyll says:

      Timing is the key difference there. Short term you are “trading,” basically gambling that the market will move the way you expect in the near term. Long term you are “investing,” and adjusting your assets to get the best you can. In essence for either to be successful you need to know your stuff and do the research, the thing is that you average person is generally not privy, or doesn’t have the time to keep track of the information that is available, to be able to make a sound and reliable judgement in short term thus the decisions might as well be gambling. Longterm trending data is often more available and even when something happens short term it’s possible to wait out the dip and often get the return.

  7. freeby50 says:

    I believe day trading is a form of gambling. Some people can make money doing it but the large majority won’t.

    But I do agree with Rob that longer term market timing based on value and fundamentals is not the same kind of thing. Normal investers can succeed by figuring out the proper time to enter and exit their investments.

  8. Pop says:

    To me, the Hewitt report says that 401k investors pretty much didn’t move their money around at all. Here’s a quote from the next paragraph of the release you linked to: “Market appreciation also boosted the amount of equity employees held in their 401(k) plans, from 59 percent in 2008 to 67 percent in 2009.”

    Looking at other allocation data from Hewitt, it basically look like 401k investors’ allocations just slide with the market without them really moving money between funds.

    But that just tells a different problem, that most workers are disengaged from their retirement savings!

  9. Garrett says:

    Jim, are you serious or is this whole article meant be sarcastic?

    TradeBot worked for 4 years… BIG DEAL. It’s only 4 years out of 40 years (assuming one works from 25 to 65). Hindsight is 20/20, so is data mining, and 4 years of profits means nothing. Show me that TradeBot can do it for 40 years first… then we’ll talk.

    • Jim says:

      It’s half sarcastic, half serious because if market timing doesn’t work for me, I don’t really care if it works at all. 🙂

  10. cdiver says:

    No day trading, no currency trading. How to get ahead now.

  11. DIY Investor says:

    Just an FYI- I’ve posted a reference to this discussion on my site as it relates to short-term and long -term market timing.

  12. Mike says:


    Good post. In order to make money in the market and really anything one needs to have a plan. Then, once you have a plan, you need to know your limitations.

    Making money via indexing and asset allocation can work out. Trend following can also work. In trend following an investor finds long term trends and sticks with them, while using certain tools to determine their “theory.” Certain trends have been:

    -Japanese Stock Market in the 1980s
    -Long US Equities from 1980 to 2000
    -Long Bonds from 1980-2000
    -Long Gold from 2001-current
    -Short US Bonds – 2010 -?

    Of course these are all examples of long term trends. But a lot of people are basing their investment “theory” on the fact that the stock market “always” goes up. When in reality, there are long periods of sideways to down trending stock prices. (Eg. 1966-1981) We’re currently in the middle of one of those periods for us equities, 2001- current

  13. freeby50 says:

    Tradebot doesn’t really sound like actual trading or speculating to me. Sounds more like they’re just skimming a penny or more off every trade and doing it in high volumes. They are manipulating penny difference between bid and ask prices and split the difference and make a profit. Like the penny stealing virus in the movie Office Space, but legalized (for now).

  14. Bella says:

    Forget the market. The sure-thing way to wealth is by being an aggressive saver…

  15. eric says:

    lol this had me chuckling…now where to find this magic program…

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