You’ve heard the old adage “buy low, sell high” when it comes to playing the stock market, and you’ve likely heard about people “timing the markets” and then crowing about making big gains. That same person bragging at the cookout, however, doesn’t tell you about the many times he lost money guessing when to buy or sell. Timing the markets almost always fails and is, to be brutally honest, quite scary. Here’s why.
Playing the Game
Timing the markets means you are predicting the best time to buy a stock or bond and the best time to sell a stock or bond. Most people know the rule of thumb is to buy when stocks are low and to sell them when they are high. Optimally, you cash out when stock value hits its peak—right before a decline or even a crash. In doing this, you maximize your profit on the sale of any stock.
Generally, investors watch market trends and read economic reports and company analysis carefully and use this data to decide when to buy or sell a stock, bond ETF or mutual fund. Ideally, an investor purchases stock just when it is exiting a bear market and entering a bull market, when stocks are low but will rise in value. That same investor then monitors trends to determine when the next downturn, correction or crash will happen and, again ideally, sells stocks at their peak, right before values crash again. But this is all a guessing game, even for the most informed investor with access to the best analysis.
Timing the markets is a controversial strategy because it is nearly impossible to do for the most talented and best informed investor, let alone the average investor lacking the skill, experience, sophisticated computer trading programs, and research resources of elite investment managers. Market crashes can be unexpected and sudden, thanks to panics or price shocks. Investors often have to play a wait-and-see game to determine whether they’re truly transitioning between bear and bull markets; by the time one is convinced he or she is firmly in the midst of a bear or a bull market, the moment of prime opportunity has passed.
That’s why, for the average investor, timing the market really ends up about being a “best guess” scenario and is a bad idea. The only way to time the markets successfully is with spectacular foresight (a skill very few possess), incredible luck—or cheating by using insider information.
The Scariest Part?
By now, you’ve realized that timing the markets is less of a strategy and more of a gamble, a game of chance where you rely on your best guess which is too often wrong. While there are plenty of tools, including software, algorithms, and historical data about trends that can help you make an educated guess, a guess is still a guess.
And the truly scary part of playing this particular game of chance? You have to be right twice! Suppose you are right and sell the S&P 500 index fund at the peak of the market before a 30% decline. Your next move is to decide when to buy. How do you know when the market has bottomed out? Timing the markets successfully requires you to be right when you sell a stock AND when you buy another—a truly scary thought.