Dispelling Investment Myths: Market Timing

The Myth: Money managers are able to utilize market timing to predict when markets will rise and fall.

The Truth: It’s virtually impossible for even the most experienced traders to consistently jump in and out just in time to catch the best days and avoid the worst days.

nobody knows what stocks are going to go up next week. Not your cousin, not your broker, not your advisor. Over time, the performance of 99.9% of stock pickers is indistinguishable from luck. That’s why I advise investors not to try to time the market.

A stock’s price is based on the earning potential of the company that issued shares. The way the market views a company’s earning potential depends upon several factors, including the company’s ability to earn profits, the state of the company’s sector, and changes in the economy.

Money managers who rely on market timing look at the various economic indicators and try to guess how the market is going to react to new information. They also try to predict exactly what that information is going to be (employment statistics, inflation, interest rates, currency exchange rates, commodity prices, etc.). They believe that by predicting how the market will react, they can buy or sell before the market rises or falls. But nobody can move your money in and out of the markets at precisely the right time over an extended period. For a market timing approach to succeed, you have to be correct twice—first, when you leave the stock market, and second, when you jump back in.

Market timing doesn’t work as an investment strategy. When news is made public, the market almost immediately analyzes the effects it may have on a particular company, and the share price changes accordingly. Unless the fund manager finds out about the news announcement before everyone else (which is known as “insider information”), he will get the information at the same time as everyone else.

This is also our first rulefor successful investing: Don’t Try to Time the Market.