Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It only takes a minute to sign up.
Sign up to join this community
There is a saying that don't time the market and I think it's true, I've noticed I under perform when I try to time market over a long period. So when does it make sense to actually time the market?
When you become an expert
The market is on a long bull run like now where it's better to not enter,
Looking at company P/E ratio etc like Warren Buffet?
For most people, never. You may think the market is on a long bull run now but no one knows whether it is going to hit the peak tomorrow or next week or next month or 3 years from now. If you wait on the sidelines, you could miss out on a lot of growth between now and then. And, of course, you have the same problem in a bear market where you can miss out on a lot of gains by not calling the bottom correctly.
Value investors like Buffet aren't trying to time the market as a whole. They're looking for individual companies which are more valuable than their current stock price suggests. Unfortunately, there are vanishingly few people who have the level of patience and humility Buffet has to realize what types of companies he can put a value on and what type of companies he can't value (i.e. most any technology company) and to avoid hot sectors. As well as the time and knowledge to do the sort of fundamental analysis that Buffet does. For the vast majority of people, if you really want to have some of your money in value stocks, you're better off finding a value mutual fund and investing in that rather than trying to buy individual stocks on your own.
When a global pandemic causes the markets to crash. You might not get in on the bottom but you can do pretty well by having cash ready to invest during rapid downturns like that. In general though, it's a poor idea to try and time the market and time in the market is more useful.
It is very easy to time the market, no expertise is really needed. Those that bought at the worst possible time, during the last major crash in 2007, are enjoying healthy profits now.
For example, if you look at SSO, a S&P500 ETF and bought a bunch in Oct of 2007, you would have paid 23.87/share. On 1/9/2009 your investment would have been worth less than $6/share. Holding into now, you would have enjoyed a 12.1% annual rate of return without considering distributions and dividends.
Provided your time horizon is long, just buy when you have the money and things will workout.
Anyone that can outperform the market by timing is not going to reveal their secret formula, unless they are feeling really generous. Gurus like Tim Sykes are very expensive and hit or miss in terms of how much money you can make from their lessons.
Why is it so hard to time the market?
The problems of timing the market are manyfold. First there is the taxation and transaction cost problem. Moving in and out of the market is costing you some money every time. Granted, if you manage to sell at the top and buy back everything one year later for half the price, you will still make a reasonable profit. The problem is, that scenario is pretty unlikely as predicting the future is hard. This means one will sell lower and buy higher than optimal.
All the while there is a bunch of money sitting around and creating opportunity cost. The expected return of equity is supposed to be higher than that of cash or bonds, which is why people invest in the stock market in the first place. So the smaller the difference between expected returns in equity and cash/bonds, the more it makes sense to time the market. The caveat being that "expected return" does not refer to historic average returns in this scenario but forward looking returns for X years (how many?) which nobody really knows.
So when does it make sense to time the market?
In theorytiming could be beneficial if your transaction costs and taxes are low and you have a pretty beneficial relation between equity and cash/bond returns and can estimate these returns pretty reliably.
Historical records for active managers suggest this is not the case.
You can't " ' time ' " the market.
("Timing" the market is just, another, utterly pointless/meaningless word made-up by the financial press to try to pretend there is rationalism in trading.)
Every single fund does worse than a simple index fund - end of story. That's all there is to "stock picking".
