Market timing has a certain allure to it.
Much like playing the lotto, it promises a fantastic high if you’re able to “strike it rich.” And unlike the lotto, it gives a certain illusion of control—the idea being that just the right combination of market analysis and mathematical wizardry can net you big, big gains.
But do the benefits of market timing outweigh the risks enough to bet your financial future on it? Let’s explore the reality of market timing as an investment strategy.
1. The Odds Are NOT In Your Favor
The number of variables that can affect a stock’s price, from market factors to global factors, is unlimited. We can, at best, make educated guesses at what may happen based on current conditions and historical data, but they remain just that—guesses.
And basing your entire net worth on guesswork is never a sound investment strategy.
Let’s look at the cold, hard numbers (because that’s really what this all comes down to). All predictions and premonitions aside, your chance at correctly “guessing” what a stock will do is, for all intents and purposes, 50/50. Even if you get it right the first time, your odds of duplicating that success and guessing right twice now drop down to 25%.
Is an investment strategy with 25% chance of success the sort you’d want to rely on?
2. It Only Gives the Illusion of Control
There’s a reason some investment firms charge you such hefty fees for managing your portfolio—because they’re providing you with the feeling that your money is in better hands under their professional stewardship. And while they may be better at playing the market than you are, they’re still not perfect—or even close to perfect.
Investment managers who make a living predicting the market will attest to how hard it is to hit the jackpot on a regular basis. They might have anticipated one market crash or interest rate spike they’re quite proud of, but how many have done this twice in a row—let alone several times in succession? Even the most skilled, full-time asset managers eventually “revert to the mean,” or perform at average.
And if the pros aren’t able to consistently predict market behavior, then you as an amateur shouldn’t wager your retirement on it.
3. Market Fluctuations Are Essentially Random
No one can tell what a stock will do from day to day. A careful combination of market analysis and savvy algorithms can help you form some educated opinions, but at their root, many market fluctuations are essentially random.
Spending your time (and money) relying on them can, at best, lose you some serious returns—and at worst, it can turn you into a frantic day trader throwing your money after the latest trends with the frenzy of a Wall Street floor trader.
4. Only a Long-Term Strategy Lets You Ride the Waves
Investment gurus tell us that, on average, the stock market has seen a return of about 7 – 9% per year when viewed over the long-term (long-term in this case meaning an investment of 20-30 years or more).
Guess how much return you’ll see year-to-year? Anywhere from a 30% loss to a 50% gain. Not the best margin of error, huh?
When viewed in the short-term, the market is a volatile seesaw with no apparent rhyme or reason to its ups and downs. If you’re basing your investment decisions on what your stock will do tomorrow, next week or next month, you may see some great wins—but you may also see some pretty devastating losses.
You’ll see much better overall yields by basing your decisions on a long-term investment strategy rooted in your own personal goals, risk tolerance and the market’s broad performance.
5. No One Knows the Future
Let’s get real. If there really was a surefire way to predict the rise and fall of certain stocks, we’d see a class of asset managers or investors who consistently outperform the market, year in and year out, for decades. That hasn’t happened.
The myth of market timing’s success is just that—a myth. It’s impossible to replicate.
Your best bet as an investor is to weather the ups and downs of the market’s whims by developing a sound long-term investment strategy based on overall return rather than the outlook of any one stock in the immediate future.