Why We Never Recommend Trying To Time The Market
Timing the market is an investment strategy which aims to make money by predicting the future values of a share or asset class.
In some ways, timing the market is a kind of attempt to ‘second guess’ the market.
While some investors swear by market timing and claim to have made good profits as a result, it is an approach we never recommend. Here are a few reasons why:
* Timing the market needs you to undertake detailed fundamental and technical analysis. This can be difficult, time consuming and isn’t always reliable.
* Timing the market means you have to guess the market not once but TWICE – first when you buy and AGAIN when you sell. The odds of getting it exactly right twice aren’t that high – they’re below 25% even before you start.
* Market timing leaves you vulnerable to buying and selling on ‘gut reaction’ or even greed rather than any logical strategy. This can lower the odds of success even more.
* The Internet has made markets much more efficient and much more reactive. Prices of shares for example are far more likely to be indicative of actual value than ever before. So cashing in on an underpriced or overpriced share – a strategy so beloved of market timers – is really hard to do nowadays.
* Some events which affect share prices are largely or completely unforeseen – the so-called ‘black swan’ events – when even the most careful market timing strategy will be blown apart. Throughout history most market crashes have been completely unforeseen. In addition factors such as natural disasters, which can and do impact markets, cannot be timed.
* Often, good opportunities can be had in periods of market volatility. Investors who time their buying and selling don’t get to benefit from this.
* The transaction costs of frequent buying and selling eat into your returns and can neutralise or even exceed them – as can the additional tax burden.
* A number of studies have shown that investors who time the market, even those who appear to do well from it, generally underperform those who stay invested for the longer term.
* Some experts believe market timing is impossible to do with any kind of precision. In other words it is a kind of gambling. Worse still, they believe that the odds of winning at say poker or playing the lottery are much better than the odds of being successful with market timing!