6 Reasons Why Market Timing Is For Suckers
From: www.forbes.com
Every so often, the stock market goes wild. Volatility goes up, people start freaking out, and there’s talk of market timing.
When you have a bull market, as we’ve enjoyed for a very long time, it’s easy to listen to the folks who say you should buy-and-hold for the long term.
When the market starts fluctuating, it becomes much harder to toe the line.
With recent volatility, people have once again started talking about how they’re buying or selling more stock. Or they’re moving into bonds.
It’s all various forms of market timing. Trying to get out while it’s still relatively high and re-enter when it’s lower.
And we always think we can do this successfully.
The reality is most of us can’t. We have no edge or advantage.
It’s no different than seeing a string of red numbers on a roulette wheel’s history and thinking it’s time to bet black.
If you want to time the market, what’s your edge?
The crazy thing is that the traditional retail investor has no edge during these times of volatility.
High-frequency traders have an edge – they’re faster than you. Way faster. It’s a clear advantage that they exploit on a daily basis and they know it.
Speed is just one reason but there are a lot more. I hope I can convince you that market timing is a terrible idea.
You Don’t Have an Edge Against the Pros
The biggest reason is that you have no advantage.
Thanks to supercomputers and complex data algorithms, investing has never been easier for retail investors. As a result, it’s harder to find hidden opportunities unless you can quickly process complex data reports.
In the past, you could find legit investing ideas by reading the Wall Street Journal and trade the headlines with a slight competitive advantage.
To get ahead in 2020, you need to trade shares before the computers price a the potential of a future event (like COVID-19 or consumer sentiment) into their trading algorithms. Consistently finding anomalies is more challenging than you think.
You’ll definitely need a “Bloomberg Terminal,” which offers access to real-time market data, and a knack for technical analysis to even consider competing with the pros. Being able to spot “golden crosses” and “death crosses” on a chart is a start, but even then the computer algorithms will execute trades in nanoseconds.
Institutional traders use algorithms that automatically execute trades when stocks match certain factors. A human isn’t physically clicking a button for each trade.
Another new factor is index fund investing. Fund managers rebalance the fund portfolios daily to maintain the proper market capitalization for each stock in the benchmark index. Even though index funds match the broad market performance, the trade volume from rebalancing affects active traders.
Platform trading speeds also play an essential factor if you’re day trading or swing trading. You may need to use a platform with advanced routing options to get the quickest execution speeds. Oh, and you will pay a flat trade commission plus a tiny amount for each share too, which eats into profits.
You Need to Be Right (A Lot)
Investing is an excellent way to build wealth—if you buy the right investments.
If your timing is right, you can earn a fortune and look like an investing genius. But if you’re wrong, you can lose more than if you stuck with a plain-vanilla index fund.
Your time in the market can be more valuable than timing the market to buy individual stocks or sector ETFs. These assets are more volatile and can have a bumpier road to earning long-term gains.
Timing your trades makes you an active investor seeking to outperform the broad market. You have to predict who the winning companies or sectors are going to be each year. You must choose the right stocks at the right price and at the right time.
The Dogs of the Dow is one of the most popular investing strategies where you buy the ten stocks with the highest dividend yield in the Dow Jones Industrial Average (DJIA). While this strategy has outperformed the DJIA in most years, it lagged the broad index by 6% in 2019.
Choosing winning stocks each year is challenging. Look at the initial expert predictions for stocks, sport championship games and toss-up political elections to see how accurate most “experts” are. A 2019 Vanguard study indicates that only 35% of active fund managers beat their market benchmark.
It’s hard to determine if that hot stock tip you want to buy is causing you to invest in a financial bubble where the easy gains have already been made or purchasing a cheap stock that’s a “value trap” and may never reach a new all-time high during your investing career.
When the inevitable market selloff or bad earnings report arrives, you will also feel pressured to sell early. Premature selling is likely if you’re timing a short-term setup. You may need to follow tight stop losses requiring you to sell before all the chips fall in place, resulting in a loss.
You Need to Be a Full-Time Investor
Most of us have a full-time job not related to stock investing. If you’re a hobby investor, that means you need to find free time to research potential trades.
Do you have enough extra time and energy after juggling life’s other demands?
Successful investors understand how the company makes money, their current balance sheet, and any potential risks to properly value a stock. This research can take hours as you read earnings call transcripts, EDGAR company filings and financial statements.
The hard work doesn’t stop once your buy order executes. You should review your positions at least once per month and potentially weekly. You must monitor share price movements and read any updated forms.
If shorting individual stocks or buying leveraged ETFs is your version of timing the market, you’ll want to check your portfolio daily.
Think you’ll do that?
Professional traders live and breathe stock market performance and company headlines to make educated investing decisions. If you’re expecting full-time results with part-time effort, you’re dreaming.
Market Timing is Stressful
Watching the hourly market movements or always having CNBC blaring in the background can be a massive emotional roller coaster.
It’s easy to second-guess your better judgment if you let the headlines, analyst ratings, and fluctuating share prices affect your emotions.
On good market days, you might buy because of FOMO (the fear of missing out). It can be even easier to panic sell on bad days to capture gains if this selloff is the start of a “black swan event.”
Once you sell, your original investment no longer has an opportunity to rebound. Most markets generally make money in the long-term despite short-term paper losses and that can challenge your risk tolerance.
What do you do when your brokerage platform is down during busy trading sessions? Timing the market may require a 24/7 uptime. Brokerage outages in critical trading periods can result in significant losses when you need to sell or lost income if you want to buy.
The Future is Unpredictable
Market gyrations may also cause you to sit on the sidelines and not invest at all. As you see an index or stock reaching new highs, you may not buy shares because you think the market is too expensive. During a correction, you might wait for the stock to log lower lows instead.
For example, you might be waiting to buy an individual stock after an earnings report to see how the market reacts. If you haven’t done your due diligence or have a short-term investment horizon, it’s hard to decide if the market is overreacting or if the share price is fairly valued.
It’s only months or years later that we can see what the market peaks and troughs are for a particular cycle. You can’t recover these lost potential earnings if your cash sits idle because of fear.
A Merrill Edge study compared the hypothetical returns of investing $1,000 into an S&P 500 index fund from 2009 until 2018 for the entire decade and missing the best 10 months and 20 months. Below is how much the original $1,000 study would be worth:
- Invested the entire period: $3,530
- Missing the 10 best-performing months: $1,580
- Missing the 20 best-performing months: $958
The next decade may have different long-term results than this Merrill Edge study. However, we know that some months will be better than others. Guessing what the good months will be ahead of time is near impossible even if you have the smartest algorithms and latest research.
Go to Vegas if You Want to Gamble
It’s easy to confuse market timing with speculation. Investing in the latest trends, IPOs, or poorly-researched stocks means you have less than 50-50 odds of earning a profit.
If you’re looking for some instant gratification, your odds of making money can be higher at the Blackjack table—or your favorite casino game. Counting cards can require less skill than poring over analyst reports. And, you also have fewer competitors at the table vying for the jackpot.
Even if you don’t bring home the jackpot, you can have more fun in the process.
