The Problem with Market Timing

Posted by William C. Prewitt, M.S., CFP® on 6 April 2009 | 0 Comments


It is not uncommon for “Buyer’s Remorse” to creep into an investor’s thinking during down markets.  Wouldn’t it make sense to sell everything at the top of a market then fully invest when the market hits the bottom?  We call this market timing and it is based upon the ability to predict future price movements.  Much heat and energy is expended by the investment community with little consistency to show for the effort.  Simple as it may seem, executing a consistent “buy low and sell high” strategy is elusive.

Practical considerations add to the difficulty.  A period of time has to elapse before determining whether a market has peaked or bottomed.  It took the US government two years to determine that the 2008-2009 downturn had started two years earlier.  By the time there is a consensus, the opportunity to sell or buy is long past.  While there will always be a few who correctly call the top or the bottom, statistically, the number who do so consistently is no greater than chance.

There are times when it is apparent that a market has bubbled or is undervalued.  The problem is in accurately determining when the bubble will burst.  An exuberant market can run for years before prices collapse.  The length of a depressed market is equally unpredictable.  Several independent organizations (e.g., Timer Digest and Hulbert Financial Digest) have tracked some market timers' performance for over thirty years.  They have found that purported market timers do no better than chance or even worse.

Our approach is to determine a client’s risk level, then manage the risk by setting up an allocation which generally forces us to sell high and buy low.  The investor has an idea ahead of time what the ride will be like.  This improves chances that the investor will stick with a strategy throughout the entire market cycle, increasing the chances of a successful investment experience. 

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