You can’t time the market. Maybe you’ll get it right once in a blue moon. But you probably won’t do it more than once. If you make market timing your primary investment strategy, your returns will suffer.
Market timing is the practice of trying to beat the returns of the stock market by predicting its movements. Some market timers use technical indicators to make their predictions. Others use economic data like unemployment or inflation rates.
While economic data and technical indicators are important to consider, they don’t tell the entire story. Many market timers ignore company fundamentals, including revenue growth rates and free cash flow generation. That’s why they tend to underperform those who remain invested through the market’s ups and downs.
Unfortunately, many investors still try to anticipate market moves. Survey data shows:
– 42% of respondents said that they engage in market timing some of the time
– 4.5% said that they always try to time the market
– 28% only said that it can’t be done
Why is it so hard to time the market?
1. transaction cost
One reason is that the transaction costs of buying and selling stocks over and over again take a big chunk out of returns.
2. Taxes
Taxes are another problem for market timers. All that buying and selling can trigger short-term capital gains taxes, which will also reduce returns.
3. We are not good enough
Probably the biggest reason market timing doesn’t work is that we’re just not good at it. Investor sentiment changes frequently. We have not found a way how to predict the stock markets mood swings. Even professional investors rarely get the timing right. Actively managed funds almost always underperform their market benchmarks. The worst offenders, small cap funds, have been outperformed by their benchmark index, the S&P SmallCap 600, nearly 96% of the time over 15 years. Very few investors are able to consistently beat the market, not the private individual not the investor who does it as his day-to-day job.
Don’t worry about trying to figure out when the market has reached a bottom or top to buy or sell.
1. Invest in high-quality companies.
2. Save and invest in the stock market on a regular basis.
3. Reinvest the dividends
Your returns will take care of themselves. You’ve got to be in it to win it. Do yourself a favor and leave the market timing and poorer results to the professionals.
Sven Franssen