Market timing is the act of moving wealth in and out of the stock market with the goal of gaining higher profits and avoiding losses. And it’s possibly one of the most debated and argued fields in investing.
On one hand, some experts claim they can pull it off perfectly – in exchange for fees. On the other hand, the market is unpredictable, and many academics claim it’s a losing game.
Let’s look at the evidence for and against trying to time the stock market, so you can determine if it’s right for you:
Why do investors try to time the stock market?
When the stock market is crashing, it can be incredibly tempting to switch asset classes, or to move your money out of stocks altogether. Conversely, during a bull market, it can be enticing to concentrate your wealth in parts of the stock market, in an attempt to seize greater profits.
Additionally, the stock market is not completely random. There are undoubtedly indicators that partially reflect whether the stock market will move up or down. However, that doesn’t necessarily mean that investors can do this with accuracy and repetition.
The evidence against trying to time the stock market
In theory, it sounds like a prudent move to sell your investments before they drop in value, or to invest more when they’re going to rise. In practice, however, the matter isn’t as simple.
No one can predict with one hundred percent certainty whether the market will go down or up. Often, investors end up losing because they buy while a stock has already risen in price, or sell when an investment is dropping. Studies by Morningstar, for instance, found that investors lose an average of 2.5% on returns each year due to improperly timing the market. The most basic tenet of investing is “buy low sell high” – but improper timing of the stock market often has the exact opposite effect.
What to do instead of trying to time the market
Rather than timing the market, you should consider a long-term investment plan. With a diversified portfolio, it is possible to ride out waves of volatility in the market and achieve long-term success. Historically, the stock market has always gone to reach new highs over time. Avoiding a myopic view and not attempting to time the market is more likely to serve you well as an investor.
At LexION Capital, we strictly follow the data, and invest our clients’ wealth in bespoke long-term investment portfolios. If you’d like to learn more, don’t hesitate to start a conversation with us today.
