Should I Try Timing the Market?
The stock market has been volatile over the last few years producing some radical situations like the Gamestop short squeeze and cryptocurrency craze. There seem to be a lot of people making a lot of money and doing so quickly! Everyone knows to make money in the stock market you have to buy low and sell high. If you are thinking you can do that better than anyone then maybe you should try timing the market.
What is Timing the Market?
Timing the market is where you are actively moving money in and out of financial markets or between funds in asset classes based on certain predictions. Individuals that employ this strategy use a number of tools called technical analysis to try and predict market price movement. They look at the stock price, trading volume, and trendlines to determine entry and exit points. There are theories about the markets that they use such as the short interest theory. This is where the number of shares that have been sold short indicates a bearish outlook on the stock. There is no shying away from the fact that short-term strategies do work. However, most market timing investors are unable to do it with such consistency that they have any advantage over the long-term investors.
How Hard Is It to Beat the Market?
A SPIVA US scorecard report in 2020, illustrated that 94% of actively managed funds that invested in large companies over 20 years underperformed their benchmark indices. These funds spend millions on research and analysis to beat the market and only 6% are successful. Consider how much time and resources are available to you.
I like to use an example of coin flipping to illustrate how difficult timing the market can be. In coin flipping, you have a 50% of getting your guess correctly. The difficulty comes in when you need to get them right in a row. Say you wanted to get 10/10 coin flips correct the probability becomes 0.098%. The stock market includes 2 coin flips because you have to time when you get in and when you get out. This is obviously an oversimplification but the principle remains applicable.
Ultimately
One of the best and easiest ways to utilize the stock market is to regularly invest your money. This utilizes a tool called dollar-cost averaging. This works by investing the same amount of money at regular intervals. In doing this you buy more shares when they are low and less when they are high.
One of my favorite quotes is from Benjamin Graham, author of The Intelligent Investor. He said,
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”
If you have questions on how investing fits into your financial plan feel free to reach out to me.