Friday Finance: DON’T TIME THE MARKET!

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Timing the Market

As briefly mentioned twice earlier, it is tempting, when looking at the ups and downs of the market, to try to time the business cycle so that you buy stocks after a crash when they are cheap, and then sell them after a long bull run, when they are much more expensive.

It sounds like a great idea, doesn’t it?  Like surfing: wait for a perfect wave that is about to break, and off you go! 

Unfortunately, countless studies show that it doesn’t work.[i]  Even professionals generally fail to pull it off.  Yes, we know the market goes up and down, but we don’t know when.  For example, in 2016 everyone knew that the ten-year bull run was getting long in the tooth, everything looked overpriced, and that a downturn must come soon.  It looked a lot like the top of the market.  Yet in 2019, the market was even higher.  If you thought you’d be clever and sell everything in 2016 to skip the inevitable crash, you would have missed out on all that growth.

Similarly, it is hard to pick the bottom of the market.  When the stock market crashed in 2008, smart people knew that it would be a good buying opportunity and a terrible time to sell.  However, (a) had they saved up a pile of cash specifically for that moment over the last five years, they would have missed out on that five years of growth that had just passed, and (b) they would not know exactly when the market had reached the bottom anyway.  They might invest greedily once the market is down 20%, only to see their painstakingly saved wealth suddenly plummet another 20%.  In the industry, this is called “trying to catch the falling knife.”

If you happen to have some spare cash for long term investments burning a hole in your pocket and suddenly the stock market crashes, fine, go ahead and pour it into your shares index fund if you want to.  If stocks are high and you need to move out of the market anyway, feel free.  But don’t make this your strategy.  Only do it if it would make sense anyway, given your broader financial goals.  For the most part, ignore what the market is doing and stick to your own plan.  And if that plan is the one suggested – making regular investments of your savings over a long period of time – you’ll do fine in the long run.  Much better than you would by trying to be sneaky and time the market.

I know, it’s like finding out there’s no Santa Claus.  Sorry I was the one who had to tell you.


[i] https://www.fool.com/investing/2017/04/02/yet-another-study-shows-that-timing-the-market-doe.aspx

Also available on many other platforms.

9 comments

  1. Catxman · September 3

    There must be SOME WAY to analyze the market and buy based on the signals it’s sending out. Warren Buffett started out with virtually nothing and at the end of his life he’s almost a centibillionaire.

    — Catxman

    http://www.catxman.wordpress.com

    Liked by 1 person

    • Nikolai Vladivostok · September 3

      Research like the study linked shows that hardly anyone can pull it off, which is why Warren is a billionaire and we’re not.
      My suggestion to anyone thinking he can time the market, pick stocks, trade crypto or whatever is: try it with 10% of your money over a decade, leaving the rest in an index fund. You’ll either beat the market in the long run or you won’t, then you’ll know.

      Liked by 2 people

      • Liz · September 3

        “Long run” being the operative word.
        Our boys think they are geniuses right now for making money in Gamestop. And they did make a lot of money. This is not a tactic for longterm success. Kind of like guessing right on the roulette wheel. I actually know a pilot who won 5 million dollars on a slot machine. He was thousands in the hole before he won that. At the time I thought anyone willing to waste thousands on a slot machine isn’t going to hold on to that money long. I was right. It has been about 15 years, two wives later, and I found out recently he owes money to friends that he can’t pay back.

        Liked by 2 people

      • Wolf · September 5

        Even after 10 years you won’t know unless you make enough trades to generate a statistically large enough sample. Wild guess would be 10k trades, so 3 per day over 10 years.

        Even then, whatever model worked during those 10 years, likely won’t work anymore cause either quants and AI will have identified the arbitrage or the market factors will have changed.

        Liked by 3 people

        • Nikolai Vladivostok · September 5

          I’m assuming most readers will do so badly over ten years that they’ll learn their lesson, or at least learn enough about investing over that period to know what they don’t know. But yes, there might be some flukes. As for day trading, studies show most fail at it after one year.

          Liked by 2 people

    • Kentucky Gent · September 4

      There are actually people working to develop a market timing model: https://crystalbull.com

      But (1) this is their full-time job, and (2) they don’t really know if they should be in or out of the market each day, until AFTER the market closes.

      It is BY FAR easier to just buy shares after every paycheck, in quality companies, and hold for the long term. That’s how Warren Buffett did it in the beginning. And WB also doesn’t buy based on “signals the market sends out”. Instead, he buys when stocks look cheap. And that has caused him to underperform recently.

      I personally know lots of people who invested in the market, and the ones who got rich just bought and held.

      Liked by 3 people

      • Wolf · September 5

        The big question is why should the economy continue to grow at say 4% given that we have picked a lot of low hanging fruit, possibility of resource constraints, fertility has been below replacement for a generation in all wealthy countries, reproduction is dysgenic, and the West is collapsing. We might get lucky with some massive new industry brought about by a technological breakthrough.
        Still, what matters is relative wealth so if stocks go down, your competitors also lose. Also the elites are in the market so it’s better to be aligned with them. So might as well buy some company shares but the focus should be on business opportunities. Bonus points if they are parasitic businesses exploiting our hostile states.

        Liked by 1 person

        • Kentucky Gent · September 6

          Unfortunately, stock market growth cannot be explained by economic growth. I say it is unfortunate because the disconnect is the result of a corrupt system. Market gains should be essentially the sum of population growth plus productivity gains, but you have to throw in the fact that the US dollar is the world’s reserve currency (for now), so the Federal Reserve can manipulate the money supply (among other things) and the US Congress can borrow with impunity (and does so).

          As for population, ours (the USA) is growing due to the (going on 60 years of) open borders policy by politicians of both swamp parties. The Central Americans pouring into America by the millions aren’t of the same lineage of the folks who built Western Civilization, but they do work for a living and spend $$$ in the economy.

          Getting back to stock market returns, politicians from both Swamp Parties are corrupt and used their insider information for insider trading around the COVID market crash last year. Nancy Pelosi is a huge shareholder in Visa (for example), and Silicon Valley oligarchs donate heavily to the incumbent politicians, in order to get preferential treatment (such as being labeled as “essential businesses”). You can be certain that both Swamp Parties are going to prop up the market, and Wall Street and other elites who profit from the markets will in turn prop up the politicians they’ve purchased.

          This is where cynicism becomes your friend. The entire US system is corrupt – the government is corrupt, Wall Street is corrupt, and our business tycoons are corrupt. (Remember, Trump campaigned on the fact that guys like him buy special treatment). So US stocks can and will outperform the underlying economic growth of the country because of the corrupt system. I don’t see this ending at least until the US dollar is replaced as world reserve currency. And even then, the giant corporations of the S&P 500 will still be doing business. In fact, they will continue to do business even if the USA breaks apart.

          Liked by 2 people

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