“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!
image source: greekshares.com