Market Timing: The practice of making buy and sell decisions based on predictions of what the market will be like in the future.
The definition of market timing may bring to mind the old adage, “buy low, sell high,” but market timing actually goes beyond simple buying and selling. It’s a highly active and involved investment strategy that constantly bets against the market.
If you do a little research, you’ll find a number of outspoken market timing advocates, because when it works, the gain is significant. However, market timing has proven to be unsuccessful for most investors.
Financial educator Paul Merriman believes in the market timing, but concedes that it will only work for roughly 1 in 100 investors. In case you are among the other 99% who aren’t so lucky, here are five potential reasons not to adopt market timing as your strategy:
1. Your timing may be behind.
For the biggest returns, many investors buy and sell just before or right as the market starts to fluctuate. But waiting until prices have already started to shift isn’t actually timing the market; it’s simply following the market.
2. Markets can move quickly.
Typically, market cycles are slow moving, taking months and years to complete. But they can also be surprisingly agile, with significant gains and losses in a single day.
3. Emotion clouds reason.
It’s scary to watch prices fall when you know exactly how much you have invested, and it can be exhilarating to think you just got in early on the next big thing. However, that emotional attachment isn’t grounded in reason and can lead to some costly mistakes.
4. Recency bias.
Recency bias is the tendency to remember recent events as if they are more relevant than events further in the past, expecting recent events to continue into the future. In terms of market timing, this puts the average investor at a disadvantage by default because they’re always expecting more of the same.
5. Market timing can get expensive
Timing the market requires active, frequent portfolio management, and brokerage fees can pile up in a hurry. Many of the investors who achieve success with market timing see results because they have extensive resources, such as extra capital to burn or personal connections with exclusive brokers or market makers.
An alternative to timing the market is a long-term, passive ETF strategy with a diverse portfolio built around tracking an index. Since indexes rise over time, they tend to be more successful for investors who are patient. While committing to a long-term strategy may not seem as exciting or tempting as timing the market, the passive approach has proven to be more cost effective and stable.
Adhering to a long-term goal means the ups and downs of the market are less likely to hurt you. Meanwhile, you’ll save the unnecessary fees that come from trying and failing to time the market. Please let me know if you’re interested in talking about a long-term plan.