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WHY MARKET TIMING FAILS FOR MOST INVESTORS
4/26/2017 9:16:39 PM
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INVESTMENT INSIGHT
Market wisdom from one of Canada’s most respected professional investment managers



By Patrick McKeough  | Monday, May 11, 2015





Timing the market depends on too many random elements and inevitably leads to losses, so successful investors learn to avoid it and invest steadily over a period of years. The practice of market timing consists of coming up with and acting on a series of guesses (or estimates, or assessments of the probabilities) to use in your buying and selling decisions, with the aim of buying near a low and selling near a high. Most market timing systems attempt to interpret and detect buy and sell signals in trading patterns and history. Some of the decisions you make with the help of market timing will bring you profits, and others will cost you money.

Many investors start out with an exaggerated idea of the value and importance of market timing. Most eventually become disillusioned with it, after they figure out that it’s costing them money.

Market timing can pay off sporadically, of course. Although the results are largely random, successes and failures are apt to run in spurts. The worst thing that can happen to you near the start of an investing career is that you make a series of successful timing decisions. This may lead you to believe that you have a natural talent for market timing, or that you’ve stumbled on a timing process that’s a guaranteed money-maker. Either of these conclusions can spur you to back your future timing decisions with growing amounts of money.

Good timing-based decisions often produce modest profits. They tend to be smaller than the losses you get from bad timing decisions. Needless to say, one of your future decisions is bound to turn out bad. If you’ve invested enough money in it, you could wind up losing much more than your accumulated winnings from prior timing-based decisions.

The danger of hunches

The best market timing advice I can offer is to buy steadily and carefully throughout your working years, and sell gradually in retirement. That approach is virtually certain to enhance your investing profits. For one thing, it stops you from selling all your stocks near a market bottom, which market timers do from time to time.

The worst market timing practice you can follow is to yield to hunches or jump to conclusions. Skittish investors watch the market and try to spot the next “correction” or temporary market setback. For them, a drop in the index over several days could be the start of a market setback. Of course, any market decline could be the start of a market setback.

A significant market setback of, say, 10% or more will come along eventually. Unfortunately, no one can consistently say when that will be. Trying to foresee setbacks is sure to cost you money, however. That’s because many of the setbacks you foresee won’t occur. If you act on your prediction and sell, you’ll miss out on profits. You may buy back in at higher prices, just in time to be in the market when the next setback does occur. That’s known as a “double whipsaw.”

Eventually it happens to a lot of market timers. Some react by giving up on market timing. Others just give up on investing.

Successful investors generally come to see occasional market setbacks as something you have to live with. The best way to protect yourself against them is to put money in the stock market only if you can afford to leave it there for at least two years, if not five.

This post originally appeared on TSI Network, © 2015 TSI Network.

Patrick McKeough, host of the TSINetwork.ca investment website, has been a professional investment analyst for more than three decades. He is also a portfolio manager and the editor and publisher of four investment advisories: The Successful Investor, Wall Street Stock Forecaster, Stock Pickers Digest, and Canadian Wealth Advisor. Follow Pat on Twitter and Facebook.

Notes and Disclaimer

© 2015 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

 
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