Successful market timing depends on guessing when to get out and when to get back in. There is a 50% chance you will guess right once, but only 25% chance that you will guess right twice.
Rick Ferri, author of Serious Money, divides market timing into intentional and unintentional:
- Intentional timing is based on fundamental and technical factors
- Unintentional timing is rooted in emotions such as fear and greed
Imagine the scene.
A professional portfolio manager is trying to justify their high fees to a client.
PPM (gloating): “I successfully predicted that market crash, jump in interest rates, falling gold prices…”
Client: “But you couldn’t repeat the process consistently. You didn’t get me back into the market before the recovery.”
PPM (crestfallen): “We were being conservative.”
Client: “Being conservative is just an excuse for being wrong. Being right only half the time is not successful market timing.”
Watch this 5-minute video in which Chris Philips and Beth Orford of Vanguard explain why timing the markets successfully is almost impossible, even for professionals.
Individual investors may become trapped by their emotional reactions.
But getting it wrong can deter investors for months or years, even for life. Their children may learn to avoid the stock market too.
A recent report says: “The crisis of 2008 is burned into their memories. The younger generations in particular are wary of investing in what they perceived to be ‘risky’ assets. Many of these investors experienced back-to-back crises and they simply don’t trust the markets.” (Source: Stashing Cash Under a Mattress, State Street)
A YouTube commenter wrote: “I’ve lost THOUSANDS trying to time the markets. It’s a hard pill to swallow, knowing that my own actions based on my best guesses as to what would happen in the short term…directly led to my losses.”
Financial pioneer, Sir John Templeton, famously said: “The best time to invest is when you have money. This is because history suggests it is not timing that matters, it is time.”
At Tucana, we think market timing is a fool’s game. Instead, we work to pick the right asset allocation from the start, and recommend holding a long-term, broadly diversified investment portfolio.
Just for fun
In conclusion, here’s a little song about timing that you might enjoy. (It was UK number one for three weeks in 1960 – a long time ago!)