Timing Stock Market is Impossible! But Why?

What is Stock Market Timing and why it is Impossible

Timing the Market:

It is not difficult to time the market. Professional day traders, portfolio managers, and full-time investors who use chart analysis, economic projections, and even gut emotions to determine the ideal times to purchase and sell assets have all been successful with short-term trading techniques. 

However, just a few investors have consistently predicted market swings, giving them a huge edge over buy-and-hold investors.

Market timing is occasionally regarded as the antithesis of a long-term buy-and-hold investment strategy. Even a buy-and-hold strategy, however, is vulnerable to some degree of market timing as a result of changing investor demands or opinions. 

The most important thing to look for is whether the investor thinks that market timing will be an important part of their strategy.

What is the Meaning of Market Timing?

Market timing is the act of using predictive methodologies to move investment capital into or out of a financial market or to swap funds between asset classes. If investors can forecast when the market will rise and fall, they may enter trades to profit from the market movement.

Market timing is frequently a critical component of actively managed investment strategies and is virtually always a fundamental technique for traders. Market timing choices might be guided by fundamental, technical, quantitative, or economic data.

Numerous investors, scholars, and financial experts feel that market timing is impossible. Other investors, most notably active traders, place a premium on market timing. While it isn’t clear if good market timing is possible, most market experts think that doing it for a long time is very hard.

Advantages of Timing Stock Market:

  1. Potentially make a huge return with minimum losses.
  2. Ability to Ride Volatility.
  3. Best suited for Short term Investors.
  4. Speculative tool for Risk takers.

Disadvantages of Timing Stock Market:

  1. Extremely Difficult to get it all right, every time!
  2. Only an expert in the field can make Money.
  3. Possibly avoid & miss out of biggest Market upswings.
  4. High Tax on Short-term gains.
  5. Consume a lot of time & homework.
  6. More money spent on Transaction charges.

Should I Time the Market?

When stock prices are high, market timing tactics are used. People become worried when they hear headlines about the stock market setting a new record. After all, “everything that ascends must descend.” 

It is true that we anticipate lower future returns when stock prices are high. Reduced returns, on the other hand, do not always imply negative returns.

The year 1720, Sir Issac Newton, one of the greatest minds to ever walk on earth made lousy mistakes like the rest of us and lost 20,000 Pounds. Inflation-adjusted, this amounts to over 4.3 Million Pounds today. Or roughly 44.6 crore rupees.

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Take Mr. Newton as an example;

Newton was an early investor in the South Sea Company. In 1720, the company obtained a contract to handle the British government’s debt. As soon as the news circulated, the South Sea stock price skyrocketed.

A lot of money was made by Newton. His timing was right. He immediately booked gains in April and made about $20,000, which was a lot of money in those days.

As the stock’s enthusiasm continued to grow with each passing day, Newton couldn’t resist the urge to purchase the hottest stock in town once more. He placed virtually all of his money in the enterprise in June of that year.

Ended up buying the South Sea at its peak! The stock plummeted in September, most likely when investors realized their profit projections were unrealistic. By October, the stock had lost more than 3/4 of its value from its high. By mid-1721, Newton’s lost all of his earlier made profits and a good part of his initial investments.

If Sir Newton couldn’t time the market. How many of us really could?

Does timing the market ever work?

Timing the market is deliberately attempting to purchase cheap and sell high. And, in an ideal world, this is what each investor desires. (After all, it is the exact description of how a long position is profited from.) Consistently accurate market timing would make you wealthy. The issue is that no investor can regularly time the market correctly.

In 1975, Nobel Laureate William Sharpe published a seminal piece of research titled “Likely Gains From Market Timing” in the Financial Analyst Journal. The study tried to determine how frequently a market timer needs to be right in order to perform as well as a passive index fund tracking a benchmark. Investors who use market timing techniques must be correct 74% of the time to outperform a benchmark portfolio with the same level of risk each year, according to Sharpe.

And even pros do not always get it correctly. According to research from Boston College’s Center for Retirement Research, target-date funds that tried market timing underperformed comparable funds by as much as 0.14% points, a difference of 3.8% over 30 years.

According to Morningstar data, actively managed funds have historically struggled to outperform their benchmarks, particularly over longer time horizons. Indeed, just 23% of all active funds outperformed their passive counterparts on average for the ten-year period ending June 2019. 

Why does Timing the Market doesn’t Work?

Timing the Market has worked very well in one place alone. It’s in the mind of an investor. Sorry, a speculator who intends to do it.

It is believed that portfolio managers, professional traders, and veteran investors possess the expertise necessary to comprehend how the market operates and are thus better suited to forecast its moves. However, this is not true. Not because they lack information or are inexperienced.

A simple fact about investing is that it’s unpredictable and there’s no way to predict when things will go your way or the other. 

Timing the market is like predicting the future. It’s virtually impossible to predict the future. Hence, it’s impossible to time the market. You may get it right once or twice. But, most likely lose it all on your third time.

Alternate for Timing the Market?

Rather than heavily depending on the seeming advantage of market timing, investors should concentrate their efforts toward developing an investment plan that is both effective and practicable in every way.

Dollar-cost averaging (DCA) is an investing method in which an investor acquires an asset many times over a period of time, resulting in various entry prices. A DCA method can help reduce the volatility of an initial investment by spreading purchases out over time rather than all at once. 

Dollar-cost averaging can be accomplished through the use of an automatic investing program or by the investor’s personal discretion over when to make subsequent investments.

In this plan, the investor chooses a fixed dollar amount or a percentage of their income to invest in pre-selected investment options like mutual funds (preferably Equity Funds).

Dollar-cost averaging (DCA) done in rupees (INR) is called Rupee Cost Averaging.

If you lack the means or the stomach to invest your lump sum in one go, consider investing in smaller sums more often. As long as you maintain the practice, rupee-cost averaging can provide various advantages:

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Timely Investment

Assists in avoiding procrastination. Some of us simply struggle to get started. We are aware that we should invest, but we never seem to get around to it. Similar to traditional pension accounts such as Employee Provident Funds, rupee-cost averaging forces you to invest regularly.

Avoid Regrets

Even the most level-headed stock trader has some remorse when an investment turns out to be badly timed. Worse, such sorrow may motivate you to alter your financial approach in order to compensate for your failure. Dollar-cost averaging can help mitigate this remorse by allowing you to make numerous small investments. And thus invest both in the ups and downs of the market.

Disciplined Investing

It eliminates the need for market timing. Rupee-cost averaging assures that regardless of market conditions, you will participate in the stock market. This does not mean that you will make money or avoid losing money in a falling market, but it does lessen the temptation to try market-timing strategies that don’t work.

Keep these study findings in mind as you work toward your financial objectives. It may be tempting to delay investing until the “perfect moment” comes along, especially in a turbulent market climate. But before you do, keep in mind the tremendous cost of delay. Even the poorest market timers in our analysis outperformed not investing at all.

Prefer Disciplined SIP.

Conclusion:

By examining price charts and employing some foresight, an investor may readily construct a “market timing” investing strategy. However, such a method is mostly subjective and does not guarantee investment success in real market conditions.

Exiting the market prior to a pandemic or global economic shock and re-entering during the recovery period is a near-impossible endeavor. There are several explanations for this. One of the key reasons is that the market’s constant flow of information is designed to mislead the investor.

Finish this article by quoting Mr.Peter Lynch. He said, β€œI can’t recall ever once having seen the name of a market timer on Forbes annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”

Disclaimer: All the information on this website is published in good faith and for general information purposes only.

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