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I've deposited a sum of money in my Roth IRA and I'd like to invest soon, but I don't a firm deadline. Is there any evidence for a strategy I can use to "time" the market over a short time horizon, or is now literally the best time to buy shares? I plan on investing in index funds, if it matters.

I'd particularly appreciate links to academic or other research, if you post a strategy besides "invest now".

  • It's absolutely impossible to know. (All "academic" work on the matter is utter toss, so forget that.) Your guess is literally exactly as good as anyone's guess. It's completely unknowable. All you can do is this (1) look at the chart JoeTaxpayer presents (2) now guess which way it's going to go. The only certainty is that it will: either go up, down, or straight along. Your guess. – Fattie Jul 7 '16 at 13:51
  • Note that hedge funds and mutual funds (ie, people who claim they can guess where the market is going), are a simple scam; completely silly. All that happens is: a company launches say four such schemes. After two years, randomly, one of them will be well up. They then simply advertise that one ("our famous fund X is up 28.3%!"), which brings it lots of money from the public. (They just forget about, or close, the other three.) – Fattie Jul 7 '16 at 13:56
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The time horizon for your IRA is years or decades, therefore there is little evidence that there is a benefit to waiting for the "perfect time" to invest.

Unless you plan on making only one or 2 years of investments now and then waiting till retirement; the other deposits you will make over the decades will have a greater influence on returns.

If you are going to search for the perfect time to invest in your index fund, pick a deadline. "I will take the first sign better than X but will not wait beyond Y".

  • +1 You can probably make/save a little, but amortized over decades, the difference on average will be negligible – JAGAnalyst Apr 3 '13 at 19:29
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The study of technical analysis is generally used (sometimes successfully) to time the markets.

There are many aspects to technical analysis, but the simplest form is to look for uptrends and downtrends in the charts. Generally higher highs and higher lows is considered an uptrend.

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And lower lows and lower highs is considered a downtrend.

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A trend follower would go with the trend, for example see a dip to the trend-line and buy on the rebound.

Whilst a bottom fisher would wait until a break in the downtrend line and buy after confirmation of a higher high (as this could be the start of a new uptrend).

There are many more strategies dealing with the study of technical analysis, and if you are interested you would need to find and learn about ones that suit your investment styles and your appetite for risk.

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    A comment would have been nice for the down vote !!! – Victor Apr 1 '13 at 10:15
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    +1 from me, although I think it's important to mention that HFT is quickly eliminating the advantages of technical analysis to the individual investor. – John Bensin Apr 1 '13 at 13:53
  • +1 - I am one of the ups. Forget the downvote/comment, Victor, it would be nice to pledge to do so, but not how system works. I've seen downvotes and scratch my head as they often appear where no opinion or debate is involved. – JoeTaxpayer Apr 1 '13 at 18:47
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    @JohnBensin, I don't think HFT is as high in Australia as it is in the US yet. However, I think that HFT would have more of an effect on short term trading, eg day traders, but very little effect on medium to long term trading & investing. People don't only use technical analysis for short term trading on intra-day charts, it can actually be used much for effectively in medium to long term trading using daily, weekly and monthly charts. I generally use daily and weekly charts as I tend to be in a trade anywhere between a few weeks to over a year. HFT has little affect during these time frames. – Victor Apr 2 '13 at 3:44
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    @JohnBensin, my point on HFT affecting short term trading more than longer term trading is firstly due to short-term traders obviously having to make quicker decisions, and secondly and more importantly, being more susceptible to smaller changes in price when entering and exiting a trade. Longer term traders on the other hand would not be as concerned about small variations in price when they buy or sell, they usually have wider stops in place and would be whipsawed out of the market less often. – Victor Apr 2 '13 at 11:33
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S&P chart

This is the S&P a bit over 20 years. If you've discovered a way to sell at 1400 in 2000, buy at 800 or so in 2003, sell again, well, you get the idea. There's strong evidence the typical investor hears the S&P is making new highs and rushes in. It's this influx that may send stocks higher from here, until the smart money senses 'overbought' and bails. I am not the smart money, but my ability to ignore emotion, and use asset allocation naturally had me selling a bit into each run up, and of course buying during downturns. Not all or none, and not with any perfect timing, just at year end when I'm rebalancing.

I am not a fan of short term timing, although I do respect Victor's observations and excellent example of when it's been shown to work.

  • How do you go about your rebalancing and how often do you do it? Just once a year? What would you sell and what would you buy during this rebalancing? – Victor Apr 2 '13 at 3:36
  • I rebalance near year end, once a year. I'd read that more frequent rebalancing didn't add to one's return, and true or not, stuck to that. 75% stocks,25% bonds, the maturity depending how I think rates are doing. The stocks are mostly S&P index, but I also have individual stocks as part of the mix as well as foreign ETFs. – JoeTaxpayer Apr 2 '13 at 4:01
  • So if some of your individual stocks and/or indexes had made good gains over the past year would you sell them down, and if so would you replace them with anything? – Victor Apr 2 '13 at 4:11
  • Individual stocks are a small enough fraction that the rebalancing doesn't impact them. I'll buy or sell through the year, and at year end it's easy to use the ETF for balancing purposes. – JoeTaxpayer Apr 2 '13 at 13:09
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Timing the market and by extension the efficient market hypothesis is one of the most hotly debated subjects in finance academia.

If you are to believe the majority of finance professors and PHD's out there chances of timing a market like the NYSE, NASDAQ or LSE is not possible.

If you are to take into account the huge amount of hedge funds and money managers who make it their job to prove the efficient market hypothesis wrong then you may have a chance.

My opinion is that the EMH is true and that timing a highly efficient market like the NYSE is very difficult or impossible even for those who spend their whole lives trying to beat it. For someone whose primary job isn’t in investments I would put the idea of timing the markets out of your head.

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    The problem with people saying you can't time the market, is that their perception of timing the market is to get out right at the top and get in right at the bottom. Most people (including private investors/traders) successfully timing the market aren't trying to get the exact top and exact bottom, they are looking for signals for changes in trends from down to up, from up to down, or from sideways to up or down. Then they wait for confirmation of these signals before they get in. Once in the market they set stop loss/profit orders which automatically get them out if conditions reverse. – Victor Apr 3 '13 at 1:36
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    Regarding EMH, if that was really the case then we wouldn't have booms and busts. EMH relies on the fact that market participants are all acting rational. You should read up on Behavioural Finance, which states that market participants are irrational, which explains why we have booms and busts. – Victor Apr 3 '13 at 1:48

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