The Investment Scientist

The Perils of Market Timing

Posted on: November 18, 2011

[Guest post by Tom Warburton] Market timing is alluring, but, you have to be right twice – when to get out and when to get back in – over and over.  We have NEVER found evidence of anyone successfully practicing this tactic over a statistically significant period of time.

Market timers get out hoping they have ‘called a market top’ – OR – get in hoping they have ‘called a market bottom’.  But then the agonizing work begins because market timers not only have to be right on When To Get Out Of Their Seat but also When To Get Back In Their Seat.   It is this second decision that is so terribly difficult.  When markets move up, or down, they do so VERY quickly.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

History Demonstrates That If Investors Miss The Best Market Days

Their Long-Term Returns Are Dramatically Reduced.

Best Days Worst Days Missed

Actually, and we don’t share this with everyone – we think we may have found the Ultimate Market Predictor = Chinese Fortune Sticks!

D&T with Chinese Fortune Sticks

What the heck, everything else has been tried.  Hem Line Indicators, Republican or Democratic victories, Seasonal Market Timing, Ouija Boards, Market Technical Indicators and other Fruitless Ideas ad nauseam.

Of course, we are just kidding.  We don’t believe we can time the markets.  We Don’t Believe Anybody Can Do It More Than Once In A Row.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

The following chart, courtesy of Index Fund Advisors, demonstrates the abject failure of 32 market timing newsletters over the decade from January of 1988 through December of 1997:

IFA - Market Timing Folly

We DO believe that the emotional stress of watching the value of your investments decline – over even a short period of time – is more than the majority of investors can bear.

Here’s our free advice – The next time the financial press or the talking heads or your friends start preaching doom-and-gloom or happy-days…please set back in your chair…take a deep breath…and ask yourself:

  1. Do I Have A Plan?
  2. Do I Have A Well-Reasoned Asset Allocation Strategy?
  3. Do I Have A Well-Reasoned Set Of Investment Vehicles?
  4. Do I Have Enough Time To Weather Inter-Period Market Drawdowns?

If you answer ‘Yes’ to all four questions…Just Do Nothing!

If you answer ‘No’ to any of the questions…Find A Great Financial Advisor.  They are out there!  If you don’t know one, please call us.  We will be happy to explore whether or not it makes sense for us to work together.  If it doesn’t, we might be able to recommend a Consultative Wealth Manager.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

1 Response to "The Perils of Market Timing"

Good info. Most market timing is basically just looking in the rear view mirror. But markets move on the unforeseen ( unless you are Nostradomous) events that occur in the future.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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