Market Timing Based On Long Term Views Does Work: Just know the valuation level you are starting from

Stock Market Strategy: Market Timing Based On Long Term Views

Short-term timing does not work because stock prices are determined by investor emotions in the short term.


If that’s the case, then short term timing and trading the market would not work because there is no way to outguess an entirely emotional process. All the intelligence in the world gives you no edge in trying to anticipate emotional choices.


This leads us to the explanation that long-term timing DOES work. The market MUST set prices properly in the long term. If prices can be wildly wrong in the short term but must be roughly right in the long term, it should be possible to know in advance which way prices are headed (in the long term only, not in the short term) just by knowing the valuation level you are starting from.

Researchers have checked the historical data. This explanation, unlike the EMT-based one, stands up to scrutiny. The same data that taught us that short-term timing never works also teaches us that long-term timing always works. Thus — it turns out that just about everything that the experts have told us about investing in the stock market over the past 30 years is wrong. Oh, my.

I believe that long-term timing works. If you change your stock allocation in response to big changes in prices, you can earn dramatically higher returns while taking on dramatically less risk. Do this throughout your investing lifetime and you can retire five years sooner than you previously thought possible.

The old model for understanding how stock investing works is in the process of collapsing. The new model for understanding how stock investing works is in the process of being built. As investors, we live in exciting times!

http://thesmarterwallet.com/2010/stock-market-strategy-market-timing-long-term/

http://knol.google.com/k/why-buy-and-hold-investing-can-never-work#

How to Identify Stock Bull Market Tops

Many Symptoms occur When Bull Market is at Major Top .These are given below

1. Yearly High of Stock Index much higher than Previous year’s High

2. Now of Shares hitting new High as percentage of Total Shares Climbs new peak

3. Very Fast upsurge in Stock prices and indices

4. Near unanimous view of Experts that This is Start of biggest bull in History

5. General Magazines Which Do not Care About Stock Markets in Normal time, puts bull run in Cover Story

6.New Theories to justify high prices, in 2008 we had the Decoupling Stheory

7. A Sea of New Investors enter the Stock market with Dreams of instant Rich

8.Market Stops reacting to Good News


http://nse2rich.com/how-to-identify-stock-bull-market-tops-are-sensex-nifty-near-the-top/

So these were the Symptoms.

Are we at Top of 2010 now or is This Bull market still Alive?

Are We are Still Quite Far From Bull market top?

What will be your decision?

What are your actions: staying invested, rebalancing or divesting partially or divesting totally?

But then you will be timing the market, a dangerous strategy too!

Reviewing the basics of getting my timing right

If your time horizon, risk tolerance profile and investment objectives remain unchanged,

• it is better not to change your investment portfolio in times of uncertainty, when it may be a temptation to consider selling investments and reinvesting when prices are lower. 
• This technique is known as market timing and is a high-risk strategy simply because nobody knows what the future holds.

Patient investors will be rewarded:  research has shown that missing out on the performance of the stock market for only a few days could have a significant effect on performance.

The techniques of dollar cost averaging and phasing in can be preferable to market timing.

Two techniques for Getting your timing right: 'dollar cost averaging' and 'phasing in' your investments

Experience has shown that investors can benefit from being patient.  Impatience is your big enemy. 

Too often investors panic and sell their shares and equity unit trusts at a low, which could result in substantial losses.

There are two techniques:

• dollar cost averaging, and
• phasing in

which can diminish the negative impact of buying and selling at the wrong times.


Dollar cost averaging

Those who continue investing at regular intervals in the expectation that the market will recover, benefit from dollar cost averaging.

Dollar cost averaging can be used to great effect with unit trusts, because as you buy more units for the same amount as prices fall (or fewere units as prices rise), you will ultimately pay a lower average price for your units.


Phasing in your investments

In times of uncertainty new unit trust investors are faced with a tough choice: 

• should they invest a lump sum, or
• should they phase in their investment over a period? 

They have two possibilities:

A lump-sum investment can be made in

• unit trusts with a large cash element,
• a share component that does not correlate with the general direction of the stock market, and
• a portfolio manager who does not hesitate to take action.

Phasing in:  Prudent or less experienced investors can consider

• phasing in their investments over some months,
• potentially benefiting from lower prices because of downward reactions.

Time, and not timing, is the key to successful investment.

So who has the best chance of success?

Another approach is to disregard the risks of market timing and to ask how great the benefits would have been if an investor's timing had been right.

Let us take a hypothetical situation of 3 people who invested a fixed amount every year for 20 years.

• Person A is extremely lucky and annually invests at a market low, as determined by a particular Stock Market Share Index (JSE All Share Index). 
• Person B is unlucky and annually invests at a market high.
• Person C invests on a 'random' date every year, in this case 31st January.

The compound return earned by

• person A over the period is 14.0% a year,
• while in the case of person B it amounts to 11.3%. 
• person C achieved a return of 12.9% a year. 

(Dividend income was not taken into account in the research.)

It is

• not surprising that an investment at a market low achieved a better return than an investment at a market high, but
• the difference in return between the high and the low/'random' date is less than expected.

Although there are times when you should be more heavily invested,

• the risk of underperformance increases considerably if you are continually with-drawing from and returning to the market. 

Investors who buy and hold have the best chance of being successful.

How does market timing impact on investments?

An analysis of the daily returns of a particular Share Market Index for the period 1991 to 2000 (dividend income excluded) showed that missing out on performance of the equity market for only a few days could have a significant effect.

DIFFERENT RETURNS IF YOU MISS OUT ON A FEW DAYS

Strategy========================Return per annum
Always fully invested===============11.8%
Miss out on 10 best days============7.1%
Miss out on 20 best days============3.9%
Miss out on 30 best days============1.3%
Miss out on 40 best days============(-1.0%)

(Source:  Plexus Asset Management)

The table shows that:

• by missing only 10 days (equal to only 1 day a year), the annual return was reduced by nearly 40%.
• by missing 40 days (only 4 days a year), the return became a loss.

Instead of reducing investment risk, market timing can, in fact, be a high-risk strategy.

Market timing sounds good in theory. It seldom works consistently in practice.

Market timing is an investment strategy that relies on:

• your being able to predict the future so that you can protect your capital by not getting caught in any market downswing. 
• You must also know when the market is going to turn around, so that you can effectively exploit any new upswings.

A market timer must always make two correct decisions:

• when to withdraw and
• when to re-enter the market.

A major issue regarding stock market or unit trust investment is the question of whether or not market timing works.  Buying low and selling high is easier said than done.

A fund that applies market timing - buys or sells depending on the direction in which the market is moving -

• can prevent you from losing money in bear markets, but
• can also result in your missing out on bull markets.

Research has shown that although market timing sounds good in theory, it seldom works consistently in practice.

How do I get my timing right?

The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.

Sir John Templeton

Buy and Hold vs. Market Timing: Some personal observations

Short term traders do not hold their stocks for too long.  They often take their profit.  They then plough them back into another new trade when they perceive the upside is better than the downside.  They are not the buy and hold types.  To them, rightly so, buy and hold is a very dangerous strategy, especially so too if they are not picking carefully the stocks they trade in.   Short term trends are totally unpredictable.  They react to graphs depicting volumes and prices; searching for and attributing meanings to these.

When the market is on the uptrend, everyone benefits.  Postings were similarly optimistic.  "Why I like stock XXX?"  "Why I like stock XYZ, very much?"... Blah. Blah. Blah.   Now that the market has shown some volatilites and uncertainties, the postings turned pessimistic.  "Beware the black swan..."  Blah. Blah. Blah.  Such thinking is typical of a market timer. 

Yet, the reality is:  No one can predict the market with any certainty.  If he can, he will own the world.  But one should invest with some knowledge of the probabilities of likely outcomes. Even more importantly, is knowing the consequences arising from these probabilities, however unlikely these maybe.  Nassim Taleb is right to point these "fatal downsides" of unintelligent or emotional investing in his two classic books.

Let me share with you a "well known' secret.  Do you know that the richest persons  in the world are all mostly "buy and hold" type investors?  Look at the KLSE bourse.  Who owns the major wealth in the KLSE?  Lee family of KLK, Lim family of Genting, Yeoh family of YTL, Teh family of PBB, Lim family of TopGlove, Lee family of IOI, .......  They are the major shareholders of the good quality successful companies.  Do they buy and sell their shares in their companies regularly?  Do they make more of their money from trading their shares or from holding onto their shares over a very very long period?

Buy and hold is safe.  It is very safe for those with a long term investing horizon.  However, there is one provision:  You need to be in the right stock.  You will need to be a stock-picker.  Pick the good quality successful companies and you will have few reasons to sell them. 

Buy and hold is certainly very safe for selected stocks.  Do not react emotionally to price volatilities.  Price volatility is your friend to be taken advantage of:  giving you the opportunity to buy these companies at a bargain and to sell them if they are overpriced.  Often, the price is correct and fair, and you need not do anything.   For the super-rich whose wealth are locked in a "buy and hold" mode for umpteen years in their good quality successful companies, this strategy has benefitted them immensely.  If they can grow rich, so can you.  After all, you can be a co-owner in their companies.  Think about this and you may wish to follow them too, buying into their companies at fair or bargain prices.  For this, you will need to be rewired appropriately.

Buy and Hold vs. Market Timing

Buy and Hold = Select your stocks for your portfolio and hold.

Stock picking is easier than timing whole market.

Nobody can predict the future.

Even a broken clock is right twice a day.

What's luck got to do with it?

Is this person skillful or lucky?

For every action, there's an opposite reaction.

Buyers & Sellers, Bulls & Bears: that is what makes the markets.

The higher the risk, the higher the expected return.

http://video.yahoo.com/watch/3913819

Anxious to buy and anxious to sell

A bull market doesn't last forever.  Sooner or later, the stampede will turn downhill.

Are you one who is anxious to buy on the way up?
Are you one who is anxious to sell on the way down?

People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock today will fetch a better price than it would fetch tomorrow.

Another telling statistics on Market Timing: Missing the chance to run with the bulls

Great Timing versus Lousy Timing
(Performance difference = 1.6% difference)

Investment returns from 1970 to 1995

Starting in 1970, if you were unlucky and invested $2,000 at the peak day of the market in each successive year, your annual return was 8.5%.

If you timed the market perfectly and invested your $2,000 at the low point in the market in each successive year, your annual return was 10.1%. 

So the difference between great timing and lousy timing is 1.6%.

Of course, you'd like to be lucky and make that extra 1.1%, but you'll do just fine with lousy timing, as long as you stay invested in stocks.  Buy shaes in good companies and hold on to them through thick and thin. 

There's an easy solution to the problem of bear markets.  Set up a schedule of buying stocks or stock mutual funds so you're putting in a small amount of money every month, or four months, or six months.  This will remove you from the drama of the bulls and bears.


Missing the chance to run with the bulls

One of the worst mistakes you can make is to switch into and out of stocks or stock mutual funds, hoping to avoid the upcoming correction.  It's also a mistake to sit on your cash and wait for the upcoming correction before you invest in stocks.  In trying to time the market to sidestep the bears, people often miss out on the chance to run with the bulls.

A review of the S&P 500 going back to 1954 shows how expensive it is to be out of stocks during the short stretches when they make their biggest jumps. 

• If you kept all your money in stocks throughout these four decades, your annual return on investment was 11.5%. 
• Yet if you were out of stocks for the fourty most profitable months during these fourty years, your return on investment dropped to 2.7%..

Market Timing Strategies

Market Timing Strategies

There are many ways to time the market, but three strategies work for most swing trades.

• First, enter a breakout or breakdown after it's under way.
• Second, wait for a pullback and enter near support/resistance.
• Third, buy or sell within a narrow range before the move begins.

Which is the best entry strategy for your next trade? Unfortunately, the right answer is never the same twice. Don't try to render entry rules into simple repetitive tasks. In truth, you need to plan each trade within the context of the

• current market environment,
• reward-to-risk ratio and
• chosen holding period.

http://alltradingideas.blogspot.com/2009/12/market-timing-strategies.html

Comments:

Useful for those hoping to profit from short-term trades.  However,  it is still not a foolproof method that can be consistently employed profitably each time.

For those investing in good quality companies for the long term, price is the most important issue.  Buy these at fair price or bargain prices, never buy them at high prices.

Crashes, corrections and bear markets cannot be predicted exactly

Nobody can predict exactly when a bear market will arrive (although there's no shortage of Wall Stree types who claim to be skilled fortune tellers in this regard).  But when one does arrive, and the prices of 9 out of 10 stocks drop in unison, many investors naturally get scared.

They hear the TV newscasters using words like "disaster" and "calamity" to describe the situation, and they begin to worry that stock prices will hurtle toward zero and their investment will be wiped out.  They decide to rescue what's left of their money by putting their stocks up for sale, even at a loss.  They tell themselves that getting something back is better than getting nothing back.

It is at this point that large crowds of people suddenly become short-term investors, in spite of their claims about being long-term investors.  

• They let their emotions get the better of them, and they forget the reason they bought stocks in the first place - to own shares in good companies. 
• They go into a panic because stock prices are low, and instead of waiting for the prices to come back, they sell at these low prices. 
• Nobody forces them to do this, but they volunteer to lose money.

Without realising it, they've fallen into the trap of trying to time the market.  If you told them they were "market timers" they'd deny it, but anybody who sells stocks because the market is up or down is a market timer for sure.

A market timer tries to predict the short-term zigs and zags in stock prices, hoping to get out with a quick profit.  Few people can make money at this, and nobody has come up with a foolproof method. 

Anybody who sells stocks because the market is up or down is a market timer for sure.

Anybody who sells stocks because the market is up or down is a market timer for sure.

A market timer tries to predict the short-term zigs and zags in stock prices, hoping to get out with a quick profit. 

Few people can make money at this, and nobody has come up with a foolproof method. 

In fact, if anybody had figured out how to consistently predict the market, his name (or her name) would already appear at the top of the list of riches peole in the world, ahead of Warren Buffett and Bill Gates.

Try to time the market and you invariably find yourself getting out of stocks at the moment they've hit bottom and are turning back up, and into stocks when they've gone up and are turning back down. 

People think this happens to them because they're unlucky.  In fact, it happens to them because they're attempting the impossible.  Nobody can outsmart the market.

People also think it's dangerous to be invested in stocks during crashes and corrections, but it's only dangerous if they sell.

They forget the other kind of danger - not being invested in stocks on those few magical days when prices take a flying leap. 

It is amazing how a few key days can make or break your entire investment plan. 

Here is a typical example:  During a prosperous five-year stretch in teh 1980s, stock prices gained 26.3% a year.  Disciplined investors who stuck to the plan doubled their money and then some.  But most of these gains occurred on 40 days out of the 1,276 days the stock markets were open for business during those 5 years.  If you were out of stocks on those 40 key days, attempting to avoid the next correction, your 26.3% annual gain was reduced to 4.3%.  A CD in a bank would have returned more than 4.3%, and at less risk.

So to get the most out of stocks, especially if you're young and time is on your side, your best bet is to invest money you can afford to set aside forever, then leave that money in stocks through thick and thin. 

• You'll suffer through the bad times, but if you don't sell any shares, you'll never take a real loss. 
• By being fully invested, you'll get the full benefit of those magical and unpredictable stretches when stocks make most of their gains.

Will this rally continue?

Will This Rally Continue?
By Rich Greifner
January 19, 2010

 

Will the recent rally continue? Or is the stock market overheated after a 65% surge?

 

I have no idea -- and frankly, I don't care.

 

Here's why you shouldn't care, either

 

http://www.fool.com/investing/general/2010/01/19/will-this-rally-continue.aspx

 

 

Here's why you shouldn't care, either
Of course it would be wonderful to be able to forecast stock gyrations, deftly jumping in and out as the market ebbs and flows. But unfortunately, it simply isn't possible to accomplish such a feat on a consistent basis, and investors' attempts to anticipate the market's short-term movements only cost them money in the long run.

 

According to a study from Dalbar Inc., the S&P 500 produced an 8.35% annual return from 1988 through 2008. However, the average equity investor realized an annual return of just 1.87% over the same period thanks to the adverse effects of market timing.

• That means an investment of $10,000 in 1988 would have grown to $49,725 over the past two decades if left untouched.
• But investors who panicked at market bottoms and chased returns as the market rose would have only $14,485 today.

 

This problem has become so widespread that in 2006, Morningstar introduced an "investor return" measure to illustrate the impact of investors' timing their purchases and sales.

• Not surprisingly, a recent Morningstar study found that investor returns trailed fund returns over the past five years in each of the 14 mutual fund categories that Morningstar tracks.

 

Still not convinced that trying to time the market is a bad idea? One final example should drive the point home.

• Thanks to big bets on Goldman Sachs (NYSE: GS), Mosaic (NYSE: MOS), and PotashCorp (NYSE: POT), Ken Heebner's CGM Focus Fund was the best-performing equity mutual fund of the past decade.
• But while CGM Focus posted an 18% annual gain over the past 10 years, the average investor in the fund lost 11% a year!

 

So rather than obsess over which way the stock market is headed next, heed these wise words from investing legend Peter Lynch: "Market timing is speculating and it rarely, if ever, pays off."

 

What does pay off?
"I don't believe in predicting markets," Lynch wrote in his classic One Up On Wall Street. "I believe in buying great companies -- especially companies that are undervalued and/or underappreciated. … Pick the right stocks and the market will take care of itself."

 

That strategy worked pretty well for Lynch, who posted 29% annual returns during his 13 years at the helm of Fidelity's Magellan Fund (sadly, most Magellan investors realized much lower returns during Lynch's tenure due to their attempts to time the market).

 

But Lynch famously focused on consumer-facing companies whose products he enjoyed, like Taco Bell (now owned by Yum! Brands (NYSE: YUM), Hanes (NYSE: HBI), and Chrysler (now owned by the U.S. government). With unemployment at a 26-year high and the U.S. consumer on the ropes, where should investors look to find the right stocks today?

 

The right stocks
That's the question I posed to Jeff Fischer, lead advisor for Motley Fool Pro. Like Lynch, Jeff and his team don't get swept up in trying to forecast short-term market movements. Instead, they seek out companies with

• sustainable competitive advantages,
• significant recurring revenue,
• diverse customer bases,
• strong free cash flow, and
• healthy balance sheets.

Here are two picks that Jeff believes will serve investors well whether the stock market heads up, down, or sideways:

 

 

 

 

Trying to Time the Market

Market timing is one of the all-time great myths of investing.  There is no strategy that consistently tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you.

Here is an interesting study in the February 2001 issue of Financial Analysts Journal, which looked at the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method. 

• The authors essentially mapped all of the possible market-timing variations between 1926 and 1999 with different switching frequencies.
• They assumed that for any given month, an investor could be either in T-bills or in stocks and then calculated the returns that would have resulted from all of hte possible combinations of those switches.  (There are 2^12 - or 4,096 - possible combinations between two assets over 12 months.) 
• Then they compared the results of a buy-and-hold strategy with all of the possible market-timing strategies to see what percentage of the timing combinations produced a return greater than simply buying and holding.

The answer?

About 1/3 of the possible monthly market-timing combinations beat the buy-and-hold strategy.  You may be thinking, "I have a 1 in 3 chance of beating the market if I try to time it.  I'll take those odds!"

But, consider these three issues:

1. The result in the paper cited previously overstate the benefits of timing because they looked at each year as a discrete period - which means they ignore the benefits of compounding (as long as you assume that the market will generally rise over long periods of time, that is).
2. Stock market returns are highly skewed - that is, the bulk of the returns (postive and negative) from any given year comes from relatively few days in that year.  This means that the risk of NOT being in the market is high for anyone looking to build wealth over a long period of time.
3. Morningstar has tracked thousand of funds over the past two decades.  Not a single one of these has been able to CONSISTENTLY time the market.  Sure, some funds have made the occasional great call, but none have posted any kind of superior track record by jumping frequently in and out of the market based on the signals generated by a quantitative model.

That is pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business - if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey

Market Timing: You need to be right 70%+ of the time to break even.

Market Timing:

You need to be right 70%+ of the time to break even.  Market timing skills are vastly overstated.  Various indicators may tell you that the market is over-valued but it does not tell you when the correction will occur.

You can always find under-valued stocks in an over-priced market.  PEs tend to revert to 16 but lower interest rates allow for much higher PEs.  There is a positive relationship between GDP growth and stock returns in any single year but it does not predict returns for the following year.

Increases in Interest rates leads to higher Cost of Equity and lower PEs.  Greater willingness to take risk leads to a higher Risk Premium for equity and higher PEs.  An increase in expected Earnings Growth leads to a higher Market PE.

• If markets are over-valued, you could switch from Growth to Value. 
• If a market increase based on real economic growth is expected, then you may switch into cyclicals. 
• If interest rates go up causing the market to drop, switch out of financials into consumer products. 
• N.B.  The market will bottom out and peak before the economy e.g. invest in cyclicals when the economy enters a recession then shift into industrials and energy as the economy improves. 
• Contrarians may invest in sectors that delivered the worst performance in previous periods.

Professional attempts at market timing have generally failed.

The Dangers of Market Timing
By Ken Little, About.com


Market timing may be the two most dangerous words in investing, especially when practiced by beginners.
Market timing is the strategy of attempting to predict future price movements through use of various fundamental and technical analysis tools.

The real benefit of knowing what is going to happen is that your return from buying a stock before it takes off is obviously better than if you have to buy the stock on its way up.

Buy Low, Sell High
Market timers are the ultimate “buy low and sell high” traders. Day traders, who move in and out of positions in minutes or hours, are the extreme market timers. They look for small profits by the dozens each day by capitalizing on swings in a stock’s price.

Most market timers operate on a longer time line, but may move in and out of a stock quickly if they perceive an opportunity.

There is some controversy about market timing. Many investors believe that over time you can’t successfully predict market movements. Market timing becomes more of a gamble in their opinion than a legitimate investing strategy.

Market Timers
Other investors argue that it is possible to spot situations where the market has over or under valued a stock. They use a variety of tools to help them predict when a stock is ready to break out of a trading range.

Unfortunately, stock prices do not always move for the most logical or easily predicable of reasons. An unexpected event can send a stock’s price up or down and you can’t predict those movements with charts.

The Internet stock bull market of the late 1990s was a good example of what happens when investors in the excitement of the moment, consciously or not, became market timers.

Next Big Thing
Every one had a hot tip about the next “big thing” and investors were jumping on stocks as they shot up. Unfortunately, most of these rockets came crashing down just as quickly and many investors held on way too long.

The disastrous result was an exact reversal of what they hoped. In the end, it was a case of “buying high and selling low.” You don’t need to know much about investing to know that’s not a successful strategy.

For most investors, the safer path is sticking to investing in solid, well-researched companies that fit their requirements for growth, earnings, income, and so on.

Conclusion
If you look for undervalued stocks, you may find one that is poised for moving up sharply given the right circumstances. This is a close to market timing as most investors should get.

http://stocks.about.com/od/investingstrategies/a/marktime100804.htm

The Problem With Market Timing Print
Friday, 26th June 2009 (by J.D.)
This article is about Investing, Real-Life

I’m in the process of consolidating all of my investment accounts at Fidelity. This isn’t because I think Fidelity is “the best”, but because I think they’re good and they’re certainly convenient. There’s a Fidelity “investor center” not far from my home. (In other words: I’m not endorsing Fidelity; I’m merely following my own advice to pick a good option instead of spending forever looking for the best.)

As I gather my various accounts under one roof, I’m also trying to set investment goals and to implement an asset allocation based on these goals. As I do this, though, I’m struggling with some emotional stuff. I’ve found that it’s one thing to write about smart investing, but it’s another thing to actually do it.

I’ve just learned a real-life lesson about market timing, for example. In general, short-term market timing doesn’t work — especially for amateur investors. If I asked you to tell me whether the stock market (or an individual stock) will rise or fall next Monday, you’d only be guessing. Investors shouldn’t make decisions based on guesses. Or wishful thinking.

Let me give you an example. I recently decided to sell a large stake in an S&P 500 index fund. In order to get my asset allocation correct, I wanted to transfer the money to bonds. But when it actually came time to sell the mutual fund, I couldn’t pull the trigger.

“What if it goes up?” I kept thinking. The market has been climbing over the past few months, and the fund was up 35% since March. 35%!! That’s a pretty good increase, but I wanted more. “Maybe I should wait until the market goes up another three or four percent,” I thought.

I held the index fund for an extra day. Then two. Then three. Each day, the market went down — and my fund followed with it.

“Ouch,” I thought. “I should have sold!” My fund had dropped 5% from the day I first decided to make the move. ”I guess I’d better just sell. Now I’m losing money that I could have safely on the bond side of my portfolio.”

So I sold.

That was early this week. As soon as I sold, the the market began to rise again. Up half a percent on one day, and the next, and then two percent yesterday.

“Holy cats!” I thought. “It’s up three percent since I sold it. I should have held on!”

This, my friends, is the problem with market timing. You can’t know what the market is going to do from day-to-day. Over the long term, the stock market has returned an average of about 10% per year. But that’s the long term. Over shorter spans, the market is volatile. It swings up and down. Over a period of days, its movements are basically random, unpredictable.

I made the decision to sell on June 12th, but I didn’t pull the trigger until June 22nd. In those ten days, my fund lost over 5% of its value. Now, in the three days since I’ve sold the fund, it’s risen 3%. Obviously, I managed to just about nail a worst-case scenario.

Market timing doesn’t always yield such poor results. But, in general, you’re better off basing decisions on your long-term goals and the market’s broad performance instead of trying to guess what your stock or mutual fund will do tomorrow.


http://www.getrichslowly.org/blog/2009/06/26/the-problem-with-market-timing/