Is It Ever Ok to Time The Market?

time the marketWe all know the stock market has been on a tear the past couple years making us all look like Warren Buffett.  My 401(k) is up nearly 14% so far this year and all I’ve done is stay the course.  I think I’ve looked at my asset allocation maybe once this year and there wasn’t much to see.  The percentages were a little off but nothing that required a re-balance, so I left it alone.

I’m a young guy, only 26, so I have a pretty aggressive 90/10 stocks to bonds allocation.  I follow a lot of the Boglehead principals: keeping my portfolio simple, going for funds with low fees, etc. and so far it’s worked.  But I think nearly every investment strategy out there has worked over the past two years.  As Charlie Sheen would say, we’re all “winning” right now due to the stock market trending up as a whole.


The Good Times

Remember these days, because these are the good times.  What we’re experiencing right now is called a “bull market”, prices are going up and there seems to be no end in sight.  This has happened before believe it or not, many times actually.  The market is cyclical and what goes up, must eventually come down.  But even though there might be high volatility in the market getting from point A to point B, the general trend is up.  That’s why we invest in equities and that’s why we’re willing to take on the additional risk.


Market Timing

The term market timing refers to the attempt of buying or selling stocks in anticipation of future market price movements.  So if you think stocks are going to take a dive, you would obviously sell a majority of your stocks and vice versa.  There is a whole class of investment advisers who specialize in ‘market timing’ and they try to predict when a market will turn and when their clients should buy or sell equities.  Sadly, many of these advisers suck at their job and fail quite often.

I know there are a handful who probably have a great track record of above market returns but a majority do not.  So by following one of these ‘market timers’ not only do they have to pick the correct times to buy and sell, but you have to pick the correct adviser.  And since many of the advisers charge outrageous fees on their funds(in the 1-2% range for a ‘good’ adviser) your returns have to beat the market average plus fees if you do actually pick a winning adviser.

That sounds like a lot of what if’s to me and that’s why I’ve never paid someone to try and time the market for me.


Downturns Will Happen Eventually

I think it’s human tendency to want more of a good thing.  Whether it’s great food, great women or great returns: if something feels good, our bodies tend to want more of it.  I’m not going to lie: when I log in to my 401(k) account every week and see the returns I’ve been getting, I know I get pretty excited and want more.  But I know that that greed is what causes people to lose a lot of money.  When stocks are trending up, you should actually consider selling them and buying more bonds in order to maintain your allocation.

Selling your best performing assets probably seems pretty counter-intuitive right?  If I owned a race horse and he was winning every race, why would I sell him and buy a bunch of donkeys?  Well if you knew that race horse was eventually going to break a leg and require thousands of dollars in surgeries, you might consider selling him right?  The same thing is true in the market, stocks don’t go up forever.  Go look at a stock chart for a Total Market Fund and tell me if that ride doesn’t look a little bit bumpy.


Locking In Gains

Even though I’m against trying to time the market as a rule of thumb, there’s one instance in which I think it could make sense.  What if your portfolio has realized large or even huge gains in the past few years and you’re content with the money you’ve made?  If your 401(k) has returned 15% halfway through the year, why not cash it all out and wait for the next downturn to come?  Obviously you run the risk that the market could keep going up and you’d lose out on that gain or maybe the market never comes back down(that’s my worry and why I don’t do it) but who cares if you have enough to meet your needs?

There’s nothing wrong with making a decent chunk of money and not wanting more.  It’s hard to overcome our natural tendencies to want more of a good thing, but if you can, you may save yourself some money down the road.  A bull market is a good thing for everyone, just make sure that if you’re going to try and time the market, you err on the side of caution and sell your stocks instead of trying to buy more.

What are your thoughts on trying to time the market?  

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  1. says

    Personally, I think the only way you should time a market is when you’re about to buy stocks. Finding bargain prices are your priority because any time a good stock is on a discounted price, you know you’ll end up earning money in the end, all you have to do is wait it out. But when it comes to selling, you never know when the stock will go down, so I think you should have a mark set up that will tell you when to sell. That’s just my two cent there.

    • says

      Picking stocks may work well for some, but is a bad idea for most IMO. But by selling a stock that’s earned you a ton of money already, isn’t this timing the market? Sure the stock could keep going up but if you’ve already doubled your money, isn’t that enough?

  2. says

    Thousands of professional “money managers” extract big bucks from small investors’ nest eggs in part to compensate for their alleged expertise in timing the market. Exactly none are able consistently and reliably to beat the returns of broad stock market indexes. I’m skeptical that I could succeed where legions have failed. :-)

    • says

      I agree Kurt, I mean these guys spend their lives studying the markets and they still can’t consistently beat the average market returns. I’m still waiting for the day where a fund manager will tie his compensation to the fund’s return.

  3. says

    I do not have the time or the expertise to time the market! I keep on dollar cost averaging into the market as it rises and falls. My asset allocation reflects my risk tolerance and is designed to reduce the volatility of the market (for my portfolio).

    • says

      Sounds like a solid strategy and I agree my time is valuable. I don’t want to spend hours researching stocks and figuring out the next hot stock. I’d rather just work during that time and invest the extra money in an index fund haha :)

  4. says

    Great advice Harry! Taking some off the table after you had a nice run makes perfect sense. But it’s human nature to want more like you said. We have to keep our greed in check. Great example with the race horse breaking its leg. Finally, the thing about market timing is you actually need to constantly be right twice. The time you buy and the time you sell. Round and round it goes!

    • says

      Yea I mean I’ll be honest I’ve done it before, quite a few times actually. And sometimes I was right, sometimes I was wrong. I don’t like investing with that much uncertainty, I want to have some type of advantage when I invest instead of throwing darts and hoping I’ll hit a bullseye(I suck at darts).

  5. says

    I’m pretty conservative. I wouldn’t try an time the market. I invest with the understanding that I know I am not the smartest investor. I don’t think I’ll be able to outsmart the collective wisdom of everyone else. Therefore, I just focus on the long term and ignore the ups and downs.

    • says

      Michael, I appreciate your honesty. That’s a common saying I’ve heard too, that people know they’re not the smartest investors but I think in this case by not trying to outsmart the market that makes you smart, haha. It’s a bit counter-intuitive but along the lines of the guys who go to Vegas to “win money”. I gamble because it’s fun, not because I think I can win.

  6. says

    Trying to time the market is a fools errand best left up to the 2% of the people that can consistently do it. It is nearly IMPOSSIBLE to do this over a lifetime and end up ahead. You’ll waste an inordinate amount of your life trying to do this and are much more likely to fail than to succeed. Don’t be tempted to try.

    • says

      Thanks Chuck, honestly I feel lucky to have had my investing epiphany so early. Not everyone can see the power of compounding interest but once they do, they tend to increase their rate of savings big time haha.

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