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Does Market Timing Work? Three Answers

May 2nd, 2024 | 3 min. read

By Advance Capital Team

market timing

If the stock market appears to be headed toward a downturn, why not simply get out to protect your money?

In the lore of investing, the concept of market timing emerges almost as a siren call, reminiscent of the enchanting yet perilous songs of the Sirens in Homer’s The Odyssey.

Just as Odysseus took measures to protect his crew from being lured to their doom, investors today must resist the temptation of market timing with caution and foresight.

At Advance Capital Management, the cornerstone of our investment management philosophy is a commitment to long-term investing. Our in-house investment team adheres to a rigorous strategic process to build portfolios that our financial advisers believe can help meet our clients’ personal needs and goals.

Given this focus, we understand the appeal of market timing, especially when viewed through the rearview mirror of past market events. However, for the reasons we give below, we know that it is like one of Homer’s stories – just a myth.

What is market timing?

Market timing is the strategy of making buy-or-sell decisions about financial assets by attempting to predict future market price movements. Basically, you attempt to sell when the market is about to drop and then buy back in as the market rebounds.

The logic seems straightforward: sell high and buy low. But it often leads to doing the exact opposite.

Many investors fall into the trap of market timing as an emotional response to the volatility of the market, spurred by alarming headlines or euphoric

highs. The desire to flee the market at the first sign of trouble or to chase the wave after a rally is a natural instinct, but one that typically veers investors off course from their long-term financial goals.

  1. Market timing is extremely difficult

Future market returns are hard to predict. Not even the most sophisticated analyses can predict them with complete accuracy. Consider that the majority of professional fund managers have unperformed the S&P 500 over the past 15 years, according to SPIVA research.

Successful market timing requires an investor to accurately predict the market’s peak and trough—a feat akin to catching lightning in a bottle. Moreover, this strategy demands a level of emotional fortitude that goes against the human instinct to follow the crowd.

The challenge is compounded by the fact that individual investors are up against professionals equipped with superior technology and research. Most often, the information that triggers an investor to act is already factored into market prices, leaving little to no room for advantage.

  1. Market timing often leads to poor returns

Market timing generally involves making numerous trades in your portfolio, which is often a losing strategy. For instance, research published in the Journal of Finance demonstrates that a higher frequency of trading correlates with diminished returns for investors.

Market timers often exit the market too late and re-enter too soon, or vice versa. This mistiming is particularly detrimental given that significant market movements typically occur within a few trading days. Missing major positive trading days can severely impact an investor’s portfolio performance.

  1. Market timing will likely cost you

Beyond the potential for reduced returns, market timing can incur additional costs. Trading fees, potential commissions, and the risk of locking in losses during downturns are tangible financial penalties.

Moreover, tax implications, depending on the account type, can further erode returns.

A wiser approach to investing

So, does market timing work? The answers are: no, no, no.

What should you do then if markets crash or take off?

Before making changes to your investment portfolio, consider whether there have been fundamental changes in your financial situation or objectives.

If not, it might be wise to emulate Odysseus: plug your ears to the siren call of market timing and stay the course.

For long-term investors, success is less about timing the market and more about time in the market. Adhering to a well-thought-out investment strategy, designed to meet your specific needs and risk tolerance, is likely to yield better outcomes.

What’s your investment strategy?

We advocate for removing emotion from investing. To this end, we offer portfolios tailored to align with each investor’s growth objectives and risk appetite.

Embracing this approach can help you invest for your long-term financial goals – retirement, college, vacation home – free from the capriciousness of market timing.

If you’re feeling uncertain about your investment strategy, consider scheduling a free investment review with an Advance Capital adviser today. You’ll get a professional assessment of your current situation and learn what you may need to keep moving forward.

Advance Capital Team

Advance Capital Management is a fee-only RIA serving clients across the country. The Advance Capital Team includes financial advisers, investment managers, client service professionals and more -- all dedicated to helping people pursue their financial goals.