Timing the Market: Can You Do it, 4 Risks & is it a Good Idea?

By Chika


Last Updated: March 24, 2023


Markets move in cycles. There are multiple indicators that at least potentially reflect the particular market phase at a given time. The cyclical phases may give the impression that it's easy to time the market. 

However, as most investors will likely agree, it is not easy to time the market.

This is reflected in the investing mantra that:

“it's about time in the markets, not timing the markets”

However, some disagree with this notion. Some investors believe that it is possible to time the market.

Is market timing a worthwhile trading strategy? Let's take a look.



What is Market Timing?

Timing the market is when an investor or trader tries to buy and sell stocks to make money from market trends.

The investor or trader times their entry and exit points based on how the market moves.

This is facilitated by using technical indicators such as:

When timing the market, the investor tries to catch the next wave and ride it. If the investor is bullish, they look out for signs that the market is in an uptrend and determines their entry point. Likewise, if the trader is shorting a stock, they look for signs that the price is declining before placing their trade. 

Market timers try to beat the market by selling when prices are high and buying when prices are low.

This is the opposite of the buy-and-hold strategy, which means maintaining a position in security through dips and market declines.

Most of the time, investors make use of fundamental and/or technical research to time the market. Sometimes it implies looking at the economy and trading on policy statements, news, or central bank announcements.

For example, if a trader thinks that economic news next week will cause the market to go up, they might want to buy:



Is it Possible to Time the Market?

Timing the market is difficult at the best of times for even the most experienced traders.

Research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing. And because timing the market perfectly is deemed nearly impossible, financial experts suggest that the best strategy is not to try to time the market at all. 

Market timing is difficult because many different investors are using their strategies and trading on their own time, so to speak. This can cause delays in markets or confusion when an otherwise clear move might present itself and makes timing difficult.


Counter arguments

Timing the market has been a contentious issue among investors for decades, if not when the stock market was established.

While the popular notion is that nobody can time the market, there are a few investors who believe that it is possible. 

Those in this school of thought believe that the buy-and-hold strategy deprives you profit making chances in the market, and it is possible to time it. Investors that share this view say that the market operates in cycles.

Knowing which securities to invest in during the cycles increases your chances of making a profit exponentially. 

Proponents of the strategy say the method allows them to realize larger profits and minimize losses by moving out of sectors before a downturn. By always seeking calmer investing waters they avoid the volatility of market movements when they are holding volatile equities.



Why Timing the Stock Market Doesn’t Work

You could try to time the market, but that's not a good idea. Even professional buyers have a hard time "beating the market," because they can't accurately predict how the market will move in the short term.

Prices on the stock market can be affected by:

  • global macroeconomic events
  • political events in a country
  • changes in certain businesses or companies
  • the general mood of buyers

So, it is usually best to make a long-term, balanced investment plan that fits your goals and how much risk you are willing to take.



What Are the Risks of Market Timing?

Missing Out on Market Gains

One of the primary hazards of market timing is the possibility of missing out on market gains.

If you are overly cautious and withdraw your funds from the market at the wrong moment, you may lose out on a significant rally or other market gains.


Transaction Costs

When trading frequently, you incur costs that can rapidly accumulate, thereby reducing your returns and leaving you potentially worse off than if you had simply remained invested in the market.


Wrong Timing Decisions

Timing the market necessitates accurate prediction of future market movements.

This is extremely challenging, and if you make the incorrect decision, you could be on the wrong side of a significant market move.


Risk of Being Wrong

Timing the market entails the risk of being incorrect, which can result in significant losses.

If you are incorrect, your losses could be significantly greater than if you had remained invested in the market.



Time to Invest is Now

The amount of time you've spent in the stock market is one of the best ways to figure out how much money you'll make.

Even though it's hard to tell what the market will do in the short term, investors can get a better idea of what will happen in the long run. When a trader lets their money grow, it has a chance to grow over time despite short-term ups and downs. 

When inflation is taken into account, the average S&P 500 return in the last decade is 14.83% (12.37% when adjusted for inflation).

This doesn't mean someone can predict what will happen this year or even in the next 10 years. But looking at long-term trends can help them understand how the market works.



The Bottom Line on Timing the Market

Not being in the market at crucial periods is typically considered the greatest market timing risk.

Those who attempt market timing run the risk of missing out on periods of exceptional returns.

Investors have a difficult time pinpointing market peaks and troughs until after they have occurred. As a result, if an investor withdraws funds from equities during a market downturn, they run the risk of missing out on profits from a subsequent market upswing.

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