Timing The Stock Market

by Mike Holman


As I’ve articulated before, I’m not a big fan of timing the stock market, and everything I’ve read about the efficient market hypothesis (that stocks are rationally priced at all times based on the sum of everyone’s understanding of the market) makes sense.

That being said, there also seems to be a great case against selling when markets fall, or buying when markets are very bullish (going up fast). Following the market sentiment apparently can erode the gains many investors could have made. The average investor supposedly made around 6% annually in the market during the 90’s, when the market as a whole was gaining 16% annually. The explanation for this was that most investors were following the “hot money” and buying things AFTER they’d increased in value.

The general advice seems to be that the best thing to do would be nothing.

Given this, if its a bad idea to sell after the market has dropped like it has recently, wouldn’t it make sense that now is a good time to buy? If people lose money selling in fear after a drop and buying in greed during a bull market, it seems to me that doing the opposite should be a good idea. This is often called a contrarian strategy and while I haven’t read much of an objective critique of it, I imagine the investors I admire would claim that its just another form of market timing.

My strategy is to buy from a pool of stocks that have a long history of uninterupted, increasing dividend payments. I currently own BMO, NA, ROC and RUS (this one was a mistake, I somehow got it in my head that it fit my criteria, and afterwards realized its a cyclical). After a price drop, it seems rationale to try to scape together more money to buy more of this (since if I figured they were worth buying at X, they should definitely be worth 90% of X).

I believe the conventional wisdom though, would be to just keep buying on my regular schedule and not try to buy extra (i.e. time the market).

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{ 6 comments… read them below or add one }

1 Mich @ BTI

You cannot time the market. I keep repeating this to myself every time i sell a stock and it goes higher the next day. Anyone who claims to be able to time the market is lying. And by timing, I mean buying very close to or at the lowest point and selling close to or at the highest point consistenly.

A profitable approach is to capitalize on people’s fear and buy when they perceive the sky to be falling. Of course, you would do such a thing because you have done your homework and know exactly what you are buying in to. This is also where discipline comes into play since as a human you are prone to emotional based decisions.

2 Guy G.

Hey,
I agree with your thoughts on timing the market.
I think trying to time the market will either cause paralysis because of the fear of getting it wrong, or similar results to gambling. Because nobody has a crystal ball, we don’t know if things will go lower or higher. The truth is, something is always going up and something else is always going down.

That’s why ‘Time IN the Market” is more important than timing.
Diversify properly, re-balance annually at a minimum, and more regularly if you’re in a volatile market.

Time in the market is key – don’t wait until you’re 40-50+

Cheers,
Guy

3 Ben P

“Given this, if its a bad idea to sell after the market has dropped like it has recently, wouldnt it make sense that now is a good time to buy? ”

I think this is part of the rationale in a Warren Buffet style “Buy and Hold” theory.

Accept that you can’t time the market. But I think implicit in the idea that you can “time the market” for profit is both buying and selling.

Assuming you’re already properly diversified, the only reason you’d sell assets is (1) Liquidation, (2) something fundamentally changed about that asset that makes it no longer desirable to hold, or (3) rebalancing.

If you’re just buying something to hold for the long term there’s a little bit of a difference.

Let’s say you make regular purchases of X dollars worth of an asset, (say an index fund). One interval the market falls and you think it’s a good deal, so you buy 1.5X dollars worth.

The downside is that your portfolio now has more of X than you anticipated it would have. The upside is that you might have gotten a good deal.

Maybe it keeps falling in the short term, you can’t time the market. But the longer you hold that asset, the more it transitions away from timing the market, to simply having invested a little extra at a good time. All other things being equal, putting in a few extra dollars at a good deal will have a net positive effect.

4 Jon

What if you had 20 years in the Market at the crash of the Great Depression? All money saved up to that point would take another 25 years to recoup. Basically starting over at year one again. How does buy and hold work out on a scenario like that? Just a thought.

5 Dimitri

@Jon

There has NEVER been a 10 year period where the stock market has had a negative return. Do your homework and don’t talk about things you don’t know!

6 lrry baruzzini

I have a question,and i dont know where to find the answer,Please could some one give me an answer?
I thought i read some where, i dont remember where, that if you had invested money either right before or during the depressionit would have taken thirty years to get your money backto where it was when you invested it. My freind says i am so wrong that i am nuts.please some one respond so maybe iam not nuts thank you much
sincerely Larry

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