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Market Timing: Should You Attempt It?

© Kirk Lindstrom

Should you try to time the market?

This is a popular debate on our site. Conventional wisdom is

Nobody has successfully timed the market with multiple occasions of getting in and out in such a way as to beat staying fully invested over the same period.

Many market pundits have achieved celebrity status for predicting a major downward move in the market but they then later fail to get the next one right (or the one after) and soon their shinning star status dims.

Most pundits try to get you to follow them with tricks that would make P.T. Barnum proud!

• They make up excuses for past errors and say they have learned since then.
• They sometimes eliminate old portfolios for the periods where they under perform in an effort to hide the evidence.
• They compare their performance to the inappropriate index when adjusted for risk/reward.

Before I would even consider following a market guru, I would look into his or her record as to how his past market timing calls have worked out.

• When was the last time he changed from 100% invested?
• What did the market do after he switched from 100% invested?
• How good is he at explaining what to do when the market seems to go against his call?
• Does he compare his/her results against the proper benchmarks for the time periods under question? Many pick the wrong indexes to compare their performance to. They often take much more risk than the S&P500 and when they outperform, neglect to mention that a more appropriate index might outperform their portfolios. When I talk of my performance (117% in 1999), I make sure to mention that the NASDAQ rather than the S&P500 is a better comparison index. 117% is still good, but not nearly as impressive when compared to the NASDAQ which went up about 85% in 1999 vs the S&P500 doing about 20%.
• What will you do if this advisor retires? What if he gets eaten by a shark while windsurfing? Does this leave you in a bind wondering when to get in or out of the market? This is especially important if you are out of the market.

These are just a few questions to start with.

Risk/Reward vs "fear and greed"

In all honesty, part of "risk/reward" means that you get higher rewards in the stock market for taking on greater risk. Periods of low or negative return are part of the equation and no market timer has repeatedly gotten in and out to beat the indexes even before you consider taxes.

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