Personal Finance 

Why You Shouldn’t Time The Market

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I separate the world of stock market traders (not actual market traders, I mean individual investors) into three categories: hardcore, informed, and casual. The hardcore ones are the ones who pore over financial documents, scan the news wires, and in general are practically up to the minute in terms of knowing the mind-set of the market. The informed ones are those who read read the news as it happens, may scan annual reports, may read some analysis documents, but in general are midway between hardcore and casual investors. The casual investor is the one that reads the news from time to time, generally goes with mutual funds, has a very general sense of the market, and on the whole isn’t as informed and relies, albeit unknowingly, more heavily on localized information (what their friends say, what a few of their favorite websites say, etc.).

I guarantee only a small subset of the hardcore market traders could’ve even predicted that the stock market performance on Wednesday was going to turn out that way. Before the bell, futures indicated that the market was going to collapse and the Dow Index was going to fall 500 points. Five hundred points. Would anyone have predicted that the Fed was going to swoop in and cut the federal funds rate by a whopping 75 basis points? Even after the bell, we were see-sawing around a loss of 200 points… until miraculously sometime in the late afternoon the market rallied like crazy and we ended up nearly 300 points?

You know what this taught me? You cannot time the market. As I mentioned in my 5 year stock market rule a few days ago, emotion dominates the short term because there are so many individual investors. It’s akin to how the world of poker changed when amateurs entered the tournament fields and threw it on its head. (Pros know the odds by heart, they play “correct strategy” based on those odds; amateurs don’t know the odds as well and often just try to catch some good luck and make “bad” decisions)

I cannot time the market, chances are you can’t time the market, so please don’t bother because you will find yourself disappointed, frustrated, and likely a little poorer for your troubles.

{ 9 comments, please add your thoughts now! }

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9 Responses to “Why You Shouldn’t Time The Market”

  1. Steve Meyers says:

    AMEN !!! I finally admitted last year I make a very bad investor. I stopped purchasing stocks, and trying to time the market. I do continue to pour money into my 401k. Last week I increased my contributions up to 15% to purchase more shares cheap as the market continues down (?).

    Have A Great Weekend All !

  2. Anthony says:

    I feel like this statement is totally untrue. That all happened in 1 day. It totally depends on what kind of time horizon you are looking at. Timing the markets takes patience, and work. What it really comes down to is not an inability to time the markets, but a lack of desire to do so. There is a big difference.

  3. fathersez says:

    You are right, it is almost impossible to time the market.

    Some technical analysis followers use flashpoints such as when the 250 day Moving Averages get higher than the index level etc. Still the next day everything can reverse.

    And for proof that big computers and fancy degrees are of no help in predicting market trends, we just have to read the local business papers on losses announced by the big banks.

  4. MonkeyMonk says:

    I only half agree with this post if only because the example given is so limiting. I agree that the market is impossible to time in the short-term that you provde in your example. Nobody really knows exactly what the market is going to do on a day-today basis.

    What you can do is react to longer trends and long-term financial movements. E.g., I greatly reduced my exposure to the financial and real estate sectors over the past 12 to 18 months. Now, I’m buying back into these sectors but at a huge discount based on when I got out.

    Is it a sure thing? No. But with patience a long-term investor can certainly push up their overall returns by reacting to these market corrections.

  5. Sofie Bundy says:

    I couldn’t agree more. In order to time the market accurately, not only would we need to know all outside factors ahead of time, but also how people will react to them. The later part is why I have always preferred a long-term, fundamental approach to a short-term, technical one. Most people are – unfortunately or fortunately, depending on how you view things – not rational. They (or should I say we) all have fears and dreams, and things and events that make us tick. To develop a perfect track record as a day trader, one would need not only to be the coolest and most right brained person in the pack (and possibly on Prozac), but also a psychologist.

  6. adfecto says:

    No matter how much a person thinks they know, it is impossible to beat the collective knowledge of “the market.” The news releases and SEC filings that the “hard core” investor reads are about as helpful as reading the 10 day weather forecast. There are broad trends that can theoretically be exploited, but can you tell me how you will know when to buy and when to sell? What are your infallible indicators.

    Lets say you want to make a play on a recession in the US. The media is all but certain this one is already in progress or will happen soon. When will you know that it is time to buy? This week, next week, next month, or some other time. MoneyMonk, over the last 12-18 months as you’ve been reducing your exposure you have missed out on dividend payments. In retrospect it is easy to see “you sold just right” but how did you know then that there wasn’t a huge rally waiting to happen. How could you have known that Goldman Sachs would post a blowout profit and the stock is up 40% over the last 18 months where as Bear Stearn’s is down 9.4% over the same period.

    Stock picking and market timing is for those who think that for some reason they are better, smarter, and more informed than everyone else on Wall Street, when in fact they are none of the above. Buy indexes, hold for the long term, minimize fees and beat Wall Street every time.

  7. I don’t agree that you shouldn’t try and time the market. I know that you can’t consistently call tops and bottoms of trends, but you can certainly make use of technical analysis to help you with your entry points.

    I’m an active investor and I always buy quality companies on weakness rather than on up days or at random.

    There’s plenty of quality companies out there that will be a lot higher in 5 years time, so timing is less of an issue, but what’s wrong with buying long-term uptrend stocks when they’re oversold in the shorter term?

  8. 49% of all fund managers are below average. The 49% that are above average are either incredibly lucky, or do a great job of timing the stocks and market segments that they pick for their funds. Private money and hedge funds are designed to hedge against losses and multiply gains in the broader market, and many do that through segment timing.

    Timing can be done, but the individual investor can’t simply look at an index or an individual stock and attempt to time consistently it, without a high degree of persistence. However, the wild card here is when you introduce macroeconomics into the picture. The recent devaluation of the dollar has been plenty of reason to time your money into gold related investments over the last 12 months. People have been talking about this for 18 months, at least. The credit and banking crisis has been reason enough to take your money out of that market segment to stem further losses. Our money policy has an effect globally, so think about that when looking for your next investment. Plenty of really smart people that have been successful timing trends, such as George Soros, are saying the next trend is commodities. The big money always goes somewhere, we just have to think outside the box and try to time our way into the upswing. Or you could just sit back and hope your fund manager is above average.

  9. Storm Broker says:

    As a generalization, trying to profit only off of timing the market is a road to disaster. However, there are trends and some days the prices of individual companies are affected by the movement of the market on the whole. By tracking companies diligently, you can recognize when they are on sale and when the right time is to purchase them. This being said, you shouldn’t purchase a company because it has one bad day or a bad week, but if you’ve been looking to purchase it for a while and it dips 1-3% in a day with the broader market, there’s nothing wrong with taking advantage of the opportunity. Likewise, if you are thinking about getting out of a position and the company has a decent upswing with the market, the time is probably right to get out of it. This is a relatively easy way to pad your returns as long as you use effective timing as a supplement to your overall strategy and not as your strategy itself.

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