One of the things that investors often hear is this: It’s time in the market, not timing the market.
However, timing the market remains a goal for many people — even though it’s difficult and can actually lead to bigger losses in the long run.
Let’s take a look at why timing the market is such an attractive strategy, and why’s so hard to do.
Why Do Investors Try Timing the Market?
First of all, timing the market is attractive because the idea is because there’s the idea that if you buy at the “right” time, you can buy low and sell high. A variation of this is “buy the dip.”
If you can get a stock or get into the market when prices are low, you get a good deal. Then, later, if you can buy when the market is at its peak, then you end up with better profits.
So, even though it seems straightforward — buy low and sell high — it’s actually difficult because timing the market is all about the “right” timing.
Reasons Timing the Market is Difficult
Timing the market is so difficult because it comes down to being able to find the perfect time to get in and out. Very few people can do this with any sort of regularity. Here’s why:
How do you know you’ve reached the bottom (or the peak)?
The first issue is this: how do you know if you’ve really reached the bottom or the peak? You might keep your money on the sidelines, waiting for the bottom. All the while, that money is sitting outside the market, not making compounding returns, as you try to find the bottom.
If you put the money in regularly using a strategy like dollar-cost averaging, you’ll buy more shares during downturns, without trying to time exactly when the bottom is reached.
Likewise, trying to find the exact peak can also be hard. Some investors hold on to their investments too long, sure that the peak hasn’t been reached — only to suffer even more when there’s a big crash. In some cases, especially if the market timing attempt is related to a meme stock, they might lose their capital in the crash.
Instead, deciding on a level to sell, or taking profits when you have them, might make more sense than trying to sell at a peak.
The market can be hard to predict
Often, we think we know how the market will behave, but it doesn’t move the way we expect. A good example is the recent Russian invasion of Ukraine. On the first day after the invasion, the Dow started by dropping more than 800 points. Many people were sure it was time to buy the dip, while others expected the market to fall further.
Indeed, many people were trying to wait for bigger losses later. Those losses never came. That same day, the Dow was up nearly 100 points.
Even if we think we know how markets should behave, there’s no guarantee they will. Trying to time the market when the market is unpredictable can lead to missed opportunities and losses.
What to Do Instead of Timing the Market
Rather than trying to time the market, it can make more sense to have a strategy in place. Some ideas for moving forward might include:
- Dollar-cost averaging: Over time, consistency can help you build wealth. Consider setting aside the same amount of money each week or month to invest automatically, and just grow your portfolio.
- Use fundamental analysis: Make decisions to buy and sell based on analysis. Decide which factors matter most to you and use that information to decide which stocks to buy and when. Sell using the same criteria.
- Concentrate on your goals instead of beating the market: Rather than trying to beat the market, create a strategy based on your own goals and needs. It can feel good to outperform a market benchmark, but it might not give you the long-term success you need. Especially since the next time you make a move you might not beat the market.
- Avoid active trading: Research indicates that most active traders lose more than they gain. Between emotional decisions, missed opportunities and the fees that come with active trading, many find themselves behind. Instead, consider looking for solid buys and hold them as long as it makes sense for your portfolio.
Everyone feels like a genius during a bull market, and that can lead to false confidence. However, if you think that you can use a strategy of timing the market to “beat” your friends, you might be disappointed in the long run.