Here’s Why You Can’t Time the Market

Experience has taught us that timing the market is like taking a shot in the dark.

Truthfully, the desire to predict market movements accurately is something that we have all courted at some point. The idea of the possibilities of immense gains and reduced losses from leaving or returning to the market just in time and nailing the predictions every time are enough to make one keep wishing.

Market timing is a trading technique involving the purchase and sale of stocks due to an expectation of specific price changes that can influence trading outcomes. It is the opposite of the “buy-and-hold strategy” and is used by experienced investors to move money between asset classes. However, this concept has been frowned upon by the majority of investors and financial advisors, specifically, due to the impossibility of consistent accuracy.

Reasons Why You Can’t Time the Market

Market Timing relies on price volatility and stems from the human propensity towards greed, fear and hindsight bias. There are numerous pointers that financial advisors and investors use to determine the phase the market is in at any given time but it is practically impossible to consistently tell when exactly to move in or out for the best possible gains. For example, the market experienced a sudden steep rise between 8:00 and 10:00 am on November 10th just after a steady decline over some days prior. These movements are depicted in Fig.1 and Fig. 2 below.

Fig 1. A Barchart Showing the Steep Rise Recorded on November 10, 2022

Fig 2. A Barchart Showing the Steady Decline Before the Steep Rise Recorded on November 10, 2022

Now let’s consider two major reasons why you can’t time the market.

The Market Moves How it Moves

The major determinant of rises and falls in the market is trader activity. Since human behavior is unpredictable to a great extent, it is difficult to determine exit and entry points that will yield maximum results over short periods. Taking a cue from Nov 10th’s sudden rise, we can see that it followed a steady decline. Looking at the chart just before the rise, one could have expected it to keep declining or rise gradually. A gradual rise may even have been followed by a steep decline. This uncertainty in market movements is why the majority of investors would rather make a plan and invest as soon as possible rather than wait for the perfect time.

You Don’t Have the Luxury of Information & Time

According to a 2018 study by the International Monetary Fund (IMF), economists were only able to predict 5 of 153 recessions in 63 countries between 1992 to 2014. These finance professionals are at the top of the list of those employed by top investment banks and firms to facilitate financial decisions. If professional economists have a hard time predicting the market, you certainly can’t rely on your ability. A lot of portfolio managers and financial professionals may have higher chances of successful predictions but this is more difficult for most individual investors. In addition, you cannot expect to be well informed to make such predictions unless you’re a day trader who can sit in front of the charts 24/7 and analyze relevant data based on years of experience.

Key Question

If professional economists have a hard time predicting the market, how do you feel about your chances?

Why You Shouldn’t Time the Market

The Cost of Wrong Predictions Is Too Much

It takes one wrong move with sufficient greed to lose all your hard-earned money. The market is characterized by best days, worst days, and those in between which are spread between bullish and bearish markets. Most investors who try to time their entry and exit from the market end up underperforming compared to long-term investors. Long-term investors keep their money in stocks and securities as is suitable for their financial goals. They only make sales or purchases backed by economic insight. If you sell your stocks today because you anticipate a price drop, what says the next dip won’t be at higher price than what you sold for? In missing the worst days, you can also miss the best days. Data from the Bank of America showed that S & P 500 investors who missed the best days between 1930 and 2020 would have a total return of 28%. However, Investors who opted for the buy-and-hold alternative would have had 17, 715% returns.

Bleeding From Fast-Paced Movements

If anybody makes a killing consistently from market timing, it is the brokerage firms. They take a commission from every transaction and if you’re game to have hundreds of these in a year, guess who is ready to collect your money in charges? Exactly! Patrons of the market timing technique are usually day traders who have a lot of small-aged assets for which they must pay higher taxes. The IRS considers investments held for less than a year as regular income and requires you to pay higher capital gains taxes. Assuming you were able to consistently predict the market’s best and worst days, you would make so much money to cover these expenses and not feel a thing. Since we have established that consistency in predictions is difficult even for economists and largely impossible for individual investors, the effects of taxes and commissions will be felt severely.

You’re Losing Money by Waiting

Market timers lose a lot of money while they wait for the perfect time to invest – which is as soon as possible. According to a 2021 test by Charles Swab, even an investor with bad timing had three times their total investment amount after 10 years compared to the one who never invested because they were waiting for the perfect time. In addition, the worst timer was not too far behind the perfect timer who ranked the highest among the types of investors considered. Keeping your money out of the market for a long time means that you have more opportunities to miss the worst days. Sadly, you will also be exposed to missing more of the best days.

It Is Difficult to Predict Two Events Correctly

Market timing requires you to make two major decisions. You must decide when to move your money out of the market and from that point, you must also work towards predicting accurately when to return. There are almost no chances that you will predict correctly for both points. You want to leave the market when the shares are priced high enough for you to make maximum gains and buy when the prices are the lowest. However, you might leave at a point where you think prices cannot go higher only for them to rise even higher by the next day. This may also be the case when you think prices are low enough for you to return. The pressure of getting both points right makes you emotional and this is the major reason why a lot of investors make bad decisions.

What Can You Do Instead of Trying to Time the Market?

In March 2020, the Vice Chairman of Bank of America, Keith Banks suggested that the time in the market was more important than timing the market. No matter how low prices fall, stock prices and returns ultimately improve over time. Hence, investors who stay put are likely to be rewarded handsomely. Your portfolio should be a mix of assets including stock and bonds which align with your financial goals. A financial advisor is essential for this. As time progresses, your portfolio must be rearranged to accommodate market changes and keep you in a good position.

Dollar-cost averaging is a great way to starve your fear and greed of attention. It involves buying a consistent volume of specific stocks or funds at a fixed time every month all through the year. You can do this, say the first day of every month. This way you will not need to time the market. It removes the influence of emotions from your decisions as there is some benefit to be enjoyed regardless of how the market moves. Investors may also benefit from opting for index funds, like the S & P 500 which are funds that move with the market. They also come with low commission rates as the fund managers do not have to do much.

In Conclusion

Market timing is a technique used in active investing. It requires in-depth analysis and 24/7 observation of the market. However, even when these are done by the most experienced investors and finance professionals, consistency in results is not guaranteed. Investors will do well to have a solid investment plan and invest as soon as they can in different kinds of assets. Where some form of strategy change is required, gradual adjustments are your best bet as sudden movements put you at risk of significant loss. Waiting too long to get back into the market causes you to miss out on important days.

This article is intended for informational purposes only and should not be considered financial advice. Consult a financial advisor for specific advice tailored to your unique situation.