Stock Market Timing is a Bad Approach


I found a Copyright 2006 Equitrend, Inc. article I thought needed to address. Please read on about Stock Market Timings and then the reasons against it.

Much has been written about the virtues and dangers of active stock market trading, or "market timing."

Most of the pundits and so-called "experts" will tell you that stock market timing doesn't work, that it's dangerous, and that "buy and hold" is the best and only way to invest.

But this conventional wisdom is patently untrue. Here are the facts based on my research and extensive real-time experience.

If you want to be a successful stock market timer, you need three key elements:

  1. A system that actually works.
  2. Discipline to follow the system.
  3. Patience to stick with the system long enough to make it work for you.

And it's tough to do all three.

Here's why:

Most market timing systems don't work. Or don't work consistently enough to be valid. Some will work in trending markets but get slaughtered during flat times. Most systems don't work in all markets.

Investors lack the discipline to follow a proven system. Once an investor finds a viable program, he or she needs the discipline to follow it. Sadly, some either can't or won't do that. When they let their own judgment or intuitions interfere, they don't get the results they want or could have enjoyed by simply following the buy and sell signals they receive.

Investors lack the patience to stick with their system. Many investors are constantly in search of the Holy Grail, a program that never loses a trade. The fact is, no method will win every trade, and investors without patience will find themselves hopping from advisor to advisor with no rewards to show for their efforts.

However, there are a number of proven systems available that recognize these pitfalls and successfully time the market to massive profits year after year. Anything you hear or read to the contrary is simply not true. Wall Street has a vested interest in opposing stock market timing because it is a threat to their very existence.

Investors have two choices. They can pursue the conventional wisdom of buy and hold and hope for the best, or the modern investor can educate himself and find a timing system with which he is comfortable to protect and grow his wealth. There are a number of proven options available, but the absolute worst thing one can do is listen to the pundits who tell you that "stock market timing" doesn't work.

Why market timing is dangerous

Now that you have seen what was said in 2006 about the advantages of stock market timing, I am here to state that it is not how you should invest simply. In my opinion, the timing of the markets is extremely riskier than buying on dips, corrections, or during a recession. Then you hold the stocks you have purchased, as these were and still are well-run companies that experienced an inequality between their value and the price it is.

Yes, you may be able to sell at or near a high, but most find it extremely difficult to then repurchase at the bottom as we tend to follow the herd mentality and find excuses to wait until things hit bottom. Then before you know it, the market is already in a Bull mode, and you have now missed your buying opportunity.

Over the last 50 years, the market has returned approximately 10%, according to an article on Motley Fool. In fact, from 2012 to 2021, the average market return was 14.8%. But what if you missed the ten best trading days of a period? Well, let us look at a bear market era from January 3, 2000, until December 31, 2019. The S&P 500 would have provided a return of 6.06%. If you tried to time the market over these 20 years and missed the ten best days, you would have a return of 2.44%. This is in no way an unreasonable assumption to miss ten days while attempting to time the markets. And if you missed 20 days? A return of 0.08%. What about 30 days? A negative return of 1.95%. Timing the market is dangerous, and nearly no one can predict yet time the market's actions.

My advice to my clients is to buy well-run companies that are experiencing a dip or pullback in their prices. Yes, well-run companies are not immune to pullbacks, dips, market corrections, or recessions. These are simply buying opportunities for investors, and a cause for celebration does not panic. As Warren Buffet famously says, "Be fearful when others are greedy. And be greedy when others are fearful." With the current state of world affairs, these are buying opportunities and not cause for panic for investors as we are viewing things long-term and are in no way trading.

Are we at or near the bottom? Probably not, but I know if you are a passive investor any day that the market is down several hundred points, it presents you an opportunity to buy. Buying does not and most times does not happen on the exact bottom. The best approach is to buy on the way down and shift to holding your position when things are heading up.

If you have any questions or need additional information, don't hesitate to contact me if you are in or near the Metro-Nashville area. If you are outside this area, you are still free to contact a qualified fee-only Registered Financial Consultant near you or me.

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