June 6, 2023

How do I time the markets?

Spoiler, you can't.



There is a cost to trying to time the market.

The impact of being out of the market for a short time can be profound, as shown by this hypothetical investment in the stock market below. In 1990 had you invested $1,000 it would be worth...

Missing only a brief period of strong returns can drastically impact overall performance. Staying invested and focused on the long term helps to ensure that you’re in position to capture what the market has to offer.

Source: The Cost of Trying To Time The Market

A recent Morningstar report showed that tactical market timing strategies underperformed simple buy-and-hold strategies by 2.75% on average.

There’s no proven way to time the market—targeting the best days or moving to the sidelines to avoid the worst—so the evidence suggests staying put through good times and bad.

Successful timing requires two correct decisions: when to sell, but also when to buy back in.

Staying invested in a diversified portfolio over the long term is considered  better practice than trying to time the market. It allows investors to capture the overall growth of the market, avoid emotional biases, and reduce the risk of missing out on potential gains. Remember, investing should be approached with a long-term perspective, focusing on fundamental principles rather than short-term market fluctuations.

Look at the best one-day market returns. The best days came during down markets when headlines and investor sentiment were apocalyptic.

As long-term investors, we can’t afford to miss those massive one-day gains.

Try shifting your focus to ensuring you participate in the bull markets (in green).  Not trying to avoid the bear markets (red). You will be amazed by the results.

Outguessing markets is more difficult than many investors might think. While favourable timing is theoretically possible, there isn’t evidence showing it can be done reliably, even by professional investors. The positive news is that investors don’t need to be able to time markets to have a good investment experience.

We asked a super-computer (ChatGPT) to fact-check us.

Q: What is better time in the stock market or timing entry and exit points in the stock market?

A: The concept of "time in the market" versus "timing the market" refers to two different investment strategies:

Time in the Market: This strategy focuses on staying invested in the market for the long term, regardless of short-term fluctuations. Investors who follow this approach believe that, over time, the stock market tends to rise, and the compounding effect of staying invested can lead to satisfactory returns. The emphasis is on having a well-diversified portfolio and maintaining a long-term perspective.

Timing Entry and Exit Points: This strategy involves attempting to predict short-term market movements to buy stocks at low prices and sell them at high prices. Investors following this strategy aim to capitalize on market trends or specific events that can impact stock prices.

Timing entry and exit points require active monitoring of market conditions, technical analysis, and potentially taking advantage of short-term trading opportunities. While the concept of timing entry and exit points can seem appealing, it is notoriously challenging to execute successfully.

The stock market is influenced by numerous unpredictable factors, and short-term price movements are often driven by random fluctuations, news events, or investor sentiment. Accurately predicting these movements consistently is extremely difficult, even for experienced investors.

Research suggests that attempting to time the market can be counter productive. Market timing requires not only getting the timing right for both buying and selling, but also avoiding missed opportunities while being out of the market. Many studies have shown that even professional fund managers struggle to consistently time the market and outperform a passive, buy-and-hold strategy over the long term.

In contrast, the "time in the market" strategy focuses on the benefits of long-term investing, such as compounding returns, reduced transaction costs, and avoiding the potential pitfalls of market timing.

By maintaining a diversified portfolio and staying invested through market cycles, investors can potentially capture the overall growth of the market over the long term.

It's important to note that individual investment goals, risk tolerance, and time horizons can influence the suitability of these strategies For most investors, a long-term approach that emphasizes time in the market and a well-diversified portfolio tends to be a more reliable path to building wealth.

Q: Can experts reliably predict what is going to happen in the stock market?

A: Experts face challenges in reliably predicting the stock market due to its complex and unpredictable nature. Historical data shows that even seasoned experts struggle to consistently outperform or make accurate short-term predictions.

Investors often adopt a diversified, long-term approach to navigate market uncertainties and focus on factors within their control, such as asset allocation and risk management.