Is it possible for an investor to ‘time the market’ or is it just a myth?

Is it possible at all to time the market? Some will tell you it is possible, but they were probably just lucky and/or were not even trying to. Others will tell you it is not possible, but they are most likely trying to find an excuse to blame poor short-term performance.

“I sold Monday morning after the Iran bombings this weekend”
by inwallstreetbets

Let’s take a serious look at this question. But first, let’s clarify what this term means.

What does it mean to time the market?

The term “time the market” refers to the strategy of attempting to predict future market movements — specifically when to buy or sell stocks — in order to maximise profits and avoid losses. The idea is to buy low (when prices are down) and sell high (when prices are up), thereby outperforming the overall market.

Step 1: Buy before prices rise, expecting an upswing.

Step 2: Selling before prices fall, to avoid losses.

How is this done? There’s no one-size-fits-all solution, but it is often based on technical analysis, economic indicators, investor sentiment, or market trends.

Is Market Timing a Myth?

We wouldn’t go so far as to say it is a myth (so the short answer is no), but it’s extremely difficult to do consistently well, especially over the long term.

Why? Well, short-term movements can occur, and they are often random and driven by unforeseen events (e.g. geopolitical crises, earnings surprises). But they can swing around just as fast.

Moreover, fear and greed can cloud judgment and lead to poor timing decisions in those situations as well as those more ‘normal’ and even volatile situations on the positive side.

Historically, a few strong market days account for a large portion of gains. Being out of the market during those days can severely impact returns. To illustrate our point, missing just the 10 best days in the S&P 500 over 20 years can reduce overall returns by more than half. Moreover, missing just the best-performing year in a period of 20 years can have a noticeable negative impact on long-term returns.

Warren Buffett once said,’ The only value of stock forecasters is to make fortune tellers look good’. It would be hard to disagree with him…if you listened to them, followed their advice without thinking and suffered losses.

It is better to adopt a ‘buy and hold’ strategy rather than a timing the market strategy. Of course, investors should keep an eye on things but only panic when their thesis no longer holds.

By that we don’t mean the stock goes down one day with one bad announcement, but does that announcement make a difference. Was a bad result just a one-off or was it because it lost several major customers that may not be able to be replaced? Is it honestly not possible for that company to find a new CEO to replace that 10-20 year veteran who quit?

Other things investors instead of timing the market may want to consider is using ETFs to minimise risk and/or employing a Dollar-Cost Averaging method (i.e. investing certain – usually fixed – amounts regularly regardless of market conditions).

Moreover, there is a fine line between selling out of a stock totally and period rebalancing, as happens with major indices. The latter strategy, we wouldn’t be quick to condemn, but it is still important that investors are maintaining emotional discipline.

Bottom line

Timing the market is not a myth, but it’s rarely successful over the long term, at least with respect to equities. This may be true with real estate, but that is for another article. For those invested in equities, it is better to ignore short-term fluctuations and stay invested in the market in the longer-term.

That’s not to deny there are situations where it may be appropriate to ‘change track’ in your thesis and adjust your portfolios, but that should be the exception and not the norm, especially in situations of short-term volatility.

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