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market timing

Also called: timing the market

Moving in and out of the market based on forecasts of where it will go next.

Market timing means moving money in and out of the market based on a forecast of what it will do next: selling before an expected fall, buying back before an expected rise. It sounds like common sense, which is why "should I wait to invest" and "is now a good time to buy" are such common searches.

The problem is that it takes two correct calls, the exit and the re-entry, and the market's biggest gains are concentrated in a handful of days and months that often come right after its worst ones, when fear is highest. Step out to avoid a fall and you can easily miss the rebound, which costs more than the fall you dodged.

For a long-term investor the practical alternative is a rule set in calm weather: a fixed monthly amount, a stock and bond mix you can hold, and rebalancing on a schedule. None of these needs a forecast, and all of them keep you invested on the days that matter most.

Example

Zapas runs the test on 480 months of synthetic Tessaro World history. $1,000 left invested for 40 years grows to $34,550, about 9.3% a year. Miss only the 10 best months, 2.1% of all months, and it ends at $14,528, 6.9% a year: 58% less money.

The catch for timers: 4 of the 10 best months came within three months of one of the 10 worst, and 5 of them fell in years 21–23, around the crash. The best single month, +11.85%, came in year 23, the year after the worst one, −11.15%.

Common mistakes

  • Counting only the fall you avoided and forgetting the rebound you can miss on the way back in.
  • Selling after a fall "until things calm down": by the time they feel calm, much of the recovery is gone.
  • Calling it "waiting for a better entry" when you hold cash for months; that is market timing too.
  • Trusting a timing strategy because it worked in one past stretch; a single history proves little.

Learn it in the course