You cannot time the market… So don’t.
Know what you can’t do
It is only human to try to maximize our wins and minimizes our losses. When you invest, there is a desire to “time the market” – try to call the highs and the lows and then buy at the lows and sell at the highs. While in theory, this sounds great, in practice this is bound to fail. Why? Because you can’t time the market.
You cannot time the market…. So don’t.
What is timing the market?
Timing the market is making investment decisions based on your perceptions of when the stock market, or stock, will increase or decrease. In other words, you sell when you think the market is at a high and you buy when you think the market is at a low. You time your investments based on where you think the stock market is at that point in order to maximize your profits.
Is timing the market a good investment strategy?
No! It is nearly impossible to time the market and you will surely lose money in the long run. In addition, you will be committing a huge mistake – interrupting your investments and any compounding gains. You should simply leave your investments in the stock market and not time the entry or exit of those investments based on if you think the stock market is at a high or low.
Then how do I invest?
For beginners to investing, we advocate the dollar cost averaging approach, where you invest a certain amount in periodic intervals. This ensures the discipline of investing, ensures consistent investing, and insulates you from the emotions of the stock market – i.e. the “fear” and “greed.” In other words, dollar cost averaging prevents procrastination, minimizes regret and keeps you from market timing. See our post “Invest a set amount every month. This is called dollar-cost averaging.” You should also know why you are investing. See our post “Why do you want to invest in the stock market?”
Don’t wait.
A further drawback of trying to time the market is that you may be waiting a long time before you invest. You might think that a low is imminent, when in fact the market rises. And guess what? You might have missed a significant bull market and instead of earning an investment return, you may have lost money, due to inflation, simply because you were waiting for a “better” entry point. The research shows that it is better to be in the market than to time the market. The longer you take to invest, the more you are “losing” out on the benefits of compounding. Read our post “Time is your friend.” This is especially true in investing.
What are the disadvantages of trying to time the market?
There are many disadvantages of trying to time the market.
As we already stated, you may miss the opportunity to invest and the market may not decline for years, leaving you on the sidelines and with lost opportunity to participate in market returns
You will have to stay on top of market movements. That means that simply watching the market will be your full-time job.
The market is volatile in the short-term and it is hard to distinguish a short-term decline from something longer. See our post “Overlook short-term volatility in favor of the long-term trend”
When you time the market, you likely will be trading instead of investing. There is a difference. Trading focuses on short-term actions and profits while investing focuses on long-term actions and profits. Because many of your trades will be short-term, you may incur higher capital gains taxes when you try to time the market.
You do not have an advantage in trying to time the market. Understand that you are a person and are observing the markets. There are computers now and trading algorithms that can detect changes in the market far quicker than you can and can act on those even before you notice a change.
Market timing is stressful and it is easy to second guess your better judgment, especially if you let your emotions rule your decisions.
Buy and Hold
We believe in the long-term buy and hold investment strategy. Remember, time is on your side and you should just invest in the stock market when you can. See our post “If you have an extra $1, invest it”and “Put your money to work by investing it.” We are believers in index investing, especially if you don’t have the time to do research or are new to investing. See our post “No Time for Research? Invest in an Index...” Most important is your mindset. Get it right. See our post “The right mindset is the most important piece of the investing puzzle.”
“My favorite time frame is forever.” – Warren Buffett
“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” –Peter Lynch
“The stock market is a device for transferring money from the impatient to the patient.” -Warren Buffett
Key: You cannot time the market… So don’t.
Check out our website SHALnCO for more resources on investing, including courses and eBooks.
Nothing in this email is intended to serve as financial or investment advice and you should do your own research and consult with appropriate advisors.