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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".
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".
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.
And lower lows and lower highs is considered a downtrend.
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.
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.
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.
