Why timing the market is impossible

These costs eat into whatever little profit they might earn seriously diminishing the returns that have been generated. The strategy of market timing becomes even worse when emotional reactions get mixed with it.

Retail investors are highly reactive to both greed as well as panic. Also, they are very sensitive to both profit and loss. This behavior is what creates short term bubbles in the market. Retail investors are the ones that the react the fastest to both greed as well as fear. As a result they buy when prices start rising and sell when prices start falling i. The record of history is crystal clear. There is no investor that has made millions and billions by timing the market.

This is an idea that is propagated by conmen to deceive working class people out of their money. The idea that someone will give you a sure money making tip is also bizarre. If they had such information, why would they pass it on to you for a small fee, when they could have been the ones making the outrageous money themselves! Mutual funds and other professional money managers are able to get away with market timing because of their size.

These funds invest huge sums of money and as a result move the market. Hence, when they time the market, they spark the greed and fear that propels retail investors into action. The funds and the retail investors therefore use the same strategy. However, it works for the funds since they are able to find a greater fool i. Not all products and services referred to in this website are available in all jurisdictions.

The information contained in the website is not intended to, and does not constitute, any offer by us to sell, nor it is intended to be an invitation or solicitation to buy, any product or service, and must not be relied on in connection with any investment or other decision. More information is available in the legal notices section of this website. This message will only be displayed once.

This website uses cookies to improve your experience on our website. We recently updated our privacy policy and our cookies policy to ensure you understand how we protect your personal information. Please note that in order to stop cookies being downloaded, you will need to change your browser settings, which we explain in our cookies policy. Skip to main content. International IFA. South Africa. Menu Menu. Why timing the market is impossible.

Share on facebook. Share on linkedin. Share on twitter. Share on email. James Robertson. Published 11 June. Click here to access a larger version of this chart in a new window. A close up of the chart highlights the dilemma. Sign up to more of our investment insights. Email address. Sign up. Learn more. Head of Investment Proposition. Facebook-f Linkedin-in Twitter Envelope. Authored Articles Coronavirus: 11 May investment update Markets started last week the week of 4 May quite weak after tensions between the US and China escalated, but went on to a strong finish, despite the less-than-reassuring economic data releases.

Read more Access more of our insights. Options for uncertain investors. Why home biases may be bad. Democracy, pineapples and semiconductors.

Could scientists help your approach to investing? Load more. Get in touch. If you simply leave your money in such funds for long enough, you should do fairly well, given that equity markets generally rise over the long run. To learn more, read Index Investing. Even if you decide not to try your luck at market timing, you should avoid a totally passive approach to investment.

Managing your money actively is not the same as market timing. It is essential to ensure at all times that a portfolio has an appropriate level of risk for your circumstances and preferences.

The balance of investments must also be kept up to date, meaning that as asset classes evolve over time, adjustments must be made. For example, over a boom period for equities, you would need to sell slowly over time to prevent the level of risk of a portfolio from rising.

Otherwise, you get what is known as portfolio drift - and more risk than you bargained for. Likewise, if you discover that the investment you were sold in the first place was never right for you, or your circumstances change, you may need to sell out, even if it means taking a loss.

Some professional fund managers also have systems for adjusting portfolios according to market conditions. This is a mechanism that automatically switches the portfolio between equities and fixed-income investments.

The allocator provides a degree of protection from bear markets , while optimizing profits in boom periods. The system is also adjusted according to personal risk profiles.

To learn more, read Surviving Bear Country. A Case Study of A Firm that Times the Market Timing the market with precision is a major challenge, but there are ways to figure out whether one should be going heavier into equities or bonds at a particular point in time. Or even entirely out of one and into the other. A good example of how this can be done is provided by the Swiss company Indexplus, which uses the relationships between the economy and the market to move in and out "just-in-time".

The firm's two partners, Thomas Kamps and Roland Ranz, believe in hanging on until the last moment before the crash, even if that means selling a bit below peak.

The rationale for this is that large gains occur in the final frenzy of a bull market - as evidenced in In other words, the approach is to let profits run and to minimize losses.

They stress that it pays off to risk some losses, but that investors need to get out when the losses are still small. For many investors, this is psychologically very difficult and, as a result, they hang on until there are massive losses.

An unemotional, high-tech model can be the best way to make these tough decisions. Indexplus entails relatively straightforward switches between equities and bonds. The company uses a model that integrates four key variables: market psychology , interest rates, inflation and gross national product into the stock market and macroeconomic environments. A decision is then made on this basis. The actual investments are partial replications of the Swiss index.

This allows for a cost-effective, active process. Furthermore, Kamps and Ranz stress that, particularly in the efficient Swiss market, stock picking does not achieve much. The situation in the U. No one knows for sure how economically efficient the market is, but it is difficult to succeed consistently at stock picking. A Delicate Balance of Pros and Cons Market timing tends to have a bad reputation and some evidence suggests that it does not beat a buy-and-hold strategy over time.

However, the investment process should always be an active one and investors should not misinterpret the negative research and opinions on market timing as implying that you can just put your money into an acceptable mix of assets and never give it another thought. Furthermore, intuition, common sense and a bit of luck may make timing work for you - at least on some occasions.