March 26, 2009, 5:00 am

3 Reasons Why You Should Not Do Market Timing

by: The Financial Blogger    Category: Investment, Market and Risk
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market-timing“I got lucky; I sold all my stocks back in July”. I’m sure that you have heard this from a colleague, a friend, a neighbour or worst, from your brother-in-law ;-). People that left the market in early 2008 are all pretty happy these days as they avoid the crash. If they are about to retire, this was possibly the best timing they ever got in their life. However, if they have to go back into the market as they still have a long term investing horizon; market timing could some severe damages to their financial plan. So here are 3 reasons why you should not do market timing:

 

#1 You have to be right 100% of the time

So if you or your financial advisor got you out of the stock market thinking it was the right timing, now, you (or he!) have to find the right timing to get back into the market. As I am writing this post, stock markets across the world have been going up like Wall Street was jumping on a trampoline for the past 2 weeks. The thing is that they are still “high” and they are not coming down. In the span of 2 weeks, the S&P 500, the Dow Jones and the S&P TSX went up for more than 15%. Do you think that February was a good timing to get into the markets?

 

Unfortunately, nobody has the right answer as to know if this was the right time to do market timing and invest in equities again. You could have done the same reasoning between November 08 and January 09. Stock exchanges went up 10% to 15% but it went back down during January and February of 2009. This is quite a challenge to do market timing in this kind of environment.

 

On the other side, if you don’t have the right timing to start investing again, you will fail in your market timing strategy. There is no point of not losing money when you can’t get into the market fast enough to capture the jump. If you are still debating as to know if it’s the right timing to put back your money, you may debate until the markets soar 25%!

 

#2 If you miss the 10 best days in the market, you have missed the entire year

This is another great reason why you should not try market timing. Studies have shown that if you miss the best 10 days in a year, your investment return will be close to nothing. So if you do market timing, you better have a real good idea of what will be the best 10 days of the market 😉

 

What if markets don’t do anything during the rest of the year and that March was the month to not miss if you want to get a good yield? Are you ready to take that chance in the name of market timing?

 

#3 You are not the only one who thinks that can time the markets!

When we are about to buy or sell a stock, we all think that we make a great deal. Well you have to remember 2 things when you are about to do a transaction:

1- If you buy thinking it’s a good deal, someone else (the seller) may think that it is a good timing to sell the very same stocks as it has reach its peak.

2- There are tons of information and people trying to trade on “their study” so if you are right about market timing, there are several people thinking the very same thing. Therefore, you chances to get a great return might not be so great after all.

 

According to my opinion, market timing is very dangerous. Do you really think that you and your financial advisor can time the market and be right over the next 10, 15, 20 years? If so, you will probably the next Warren Buffet…. Good luck!

 


 

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Comments

Very good and accurate post. Marketing timing is a dangerous pastime and could lead to financial problems down the road.

To attempt to time the market right all the time is next to impossible, nor should it be something that an investor attempts to do. But careful timing of major entries and exits are crucial as a way to compliment good fundamental analysis.

Yes, I agree that ‘if somebody misses 10 best trading days, then probably he’ll be losing the maximum from the market’. Good thing! New entrants should read this!! Good article!

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I agree with this theory, but I bailed in 2008 anyway. There was too much gloomy info out there that everyone seemed to be ignoring. I’ll start buying back in when things settle, because there is no way the worst is over.

Folks whom believe the can time the market make the rest of us rich. Please stop providing sound advice. I need more suckers in the pool.

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The recent rally just proved that market timing is close to impossible. I was lucky in averaging down on some of my best ideas but I missed a whole lot more as I was waiting for the market to drop lower.

Many times I’ve heard the old saw about “if you miss the 10 best days…” mostly from stockbrokers. But I’ve never heard anyone say what happens if you miss the 10 WORST days.

by: The Financial Blogger | March 29th, 2009 (7:43 am)

John,
You bring a really good point!
Your return would probably be 2 times the index (if not more!). then again, how can you predict it?

Financial blogger: great post and great response to John. If market timing were easy, I would certainly be the first to do it. After all, I am not so proud as to avoid being wrong if it will make me rich without compromising my principles. But it’s impossible. Even someone like Warren Buffet, to the extent he does market timing, is doing so over decades not days or weeks. And by his own admission in his letter to shareholders, he makes mistakes too.

Many of the guys who sold in July actually sold some in July, had plenty of money on the side the previous years of stellar returns and missed the recent run-up. And how come they weren’t talking about their perfect sell timing back in the late nineties? As you said, you have to be right 100% of the time and no one is.

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by: The Truth | March 18th, 2010 (12:30 am)

This entire line of thinking is garbage. An investor would NOT have to time the market right 100% of the time to help increase overall returns. Also, market cheerleaders always like to pull out the “miss the 10 best days” line of thinking as a reason to always stay invested. Why don’t you ever look at the opposite side-what if you missed the 10 worst days? You know why? Because missing the ten worst days has a much larger positive effect overall than missing the ten best days has a negative one. But actually looking at both sides of the coin would disprove your theory so you won’t mention it.

by: The Financial Blogger | March 18th, 2010 (4:29 am)

@ The Truth,
So tell me when were you able to get out of the market and get back between 2008 and 2009? if you have been slightly wrong on this one, you probably toss away most of the return in 2009…

Doing marketing is like playing casino. If you think otherwise and you tell me that you know what you are doing, I guess you must have took all your possible assets and time the market in 2008-2009. Someone who was able to do it is probably a millionaire by now!

If it was possible to time the market, most brilliant investors would have succeed in 2008-2009. However, this is not what happen with Warren Buffett and others…