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Why You Shouldn’t Time The Market

Posted By Jim On 01/26/2008 @ 8:57 am In Personal Finance | 9 Comments

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 [3] 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.


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