There is a lot to lose and little to gain from market timing.

There is a lot to lose and little to gain from market timing.

When it comes to so-called market timing, there are only two sorts of people

1. those who can't do it, and
2. those who know they can't do it.

It is safer and more profitable to be in the later camp.



What is market timing?

With the Covid-19 pandemic dominating the news and recent volatility on world stock markets, you may have heard a lot about market timing again. 

Advisers and financial commentators will probably not use that actual term.  What they will talk about is whether you should sell some or all of your equity investments because of the economic effects of the coronavirus and the subsequent effect on the market.

All of this what is termed "market timing" in the jargon of the investment trade - holding back investment or taking some or all of your money out of the market when you anticipate a fall.



Problem of this approach:  Can you anticipate the markets?

The word "anticipate" indicates the first problem with this approach. 

Most people whom I encounter take their money out during or after a fall - as they did in March. 

[They are doing the equivalent of driving whilst looking in the rear view mirror (or at best, out of the side window of the car).  You need to look out of the windscreen in order to have the best chance of driving safely.  The trouble with doing that in terms of the stock market is that the visibility is often so poor, it feels like driving in fog.]



Markets are second order systems

Such approaches to investment are almost all futile.  Markets are second order systems.  What this means is that in order to successfully implement such market timing strategies:

1.  you not only have to be able to predict events - 

• interest rates, 
• wars, 
• oil price shocks, 
• the impact of the coronavirus, 
• the outcome of elections and referendums - 

2.  you also need to know what the market was expecting,

• how it will react and 
• get your timing right.  

Tricky.



Reference: Financial Times