People are constantly up in arms over changes in the market from day to day. If you pay attention to social media or the news, you’ve undoubtedly heard people talking about timing the market. You may have heard huge success stories about people getting rich because they timed something perfectly, but you’ve probably also heard about people losing everything because they thought they could time the market and failed. In this article we’re going to go over everything about timing the market. We’ll discuss how to do it as well as why you should or shouldn’t time the market.
If you’re just getting started in investing, and have no idea what any of this is, check out my guide on getting started.
What Does It Mean To Time The Market?
Timing the market involves buying or selling assets because of predictions about their future performance. More simply, if someone predicts an asset will go up in value, they’ll buy some to sell later – after the increase in value. Alternatively, if someone predicts an asset will go down in value, they’ll sell what they own to avoid losing money when the value depreciates. These assets can be just about anything, including individual stocks, cryptocurrency, index funds, ETFs, and even commodities.
When someone is timing the market, they’re mainly just trying to predict what will happen and when, so that they can make as much money as possible from it. While that does sound appealing in theory, there are a ton of issues with it.
Sell High, Buy Low
If you are having a hard time understanding the concepts behind timing the market, this is all you really need to know. In fact, the goal of every investor should be to sell high and buy low. However, if you are trying to time the market then you are working on shorter timelines than most investors, so it becomes much more difficult. In essence, people who time the market are just trying to buy assets for a low amount and then sell those assets for a high amount (certainly higher than what they purchased it for). Sometimes those who time the market are even trying to do that within the span of a 24 hour period!
How Much Money Can Be Made If You Time The Market Perfectly?
If you’re able to time the market perfectly every single time, the sky is basically the limit. Being able to time the market guarantees you great returns, and consistently. However, I don’t know anyone who can time the market perfectly every single time, so real-life experiences will be drastically different. You might have some people who make a decent amount, but you will have others losing everything. For context, the average trader makes far less than long-term investors who just sit on their investments and ride them out with the market.
Technical Analysis
Most people who trade and time the market attribute their success (or failure) to their technical analysis. This is where they’re collecting data on their asset and trying to predict how it will change. The information they use to make these predictions varies, but the core of it tends to be the historic changes of price and quantity/demand. This is all well and good to know, but there are so many variables at play that it can make accurate predictions hard. Even if you’re one of the most accurate with your analysis, there will still be a wide margin of error that you’ll have to consider.
Speculation
Here lies the major issue with timing the market. It’s speculative. It’s quite inaccurate. What people are trying to predict is, by nature, unpredictable. If you time the market perfectly, you can make a lot of money. The issue is that nobody can time the market perfectly – not every time, and probably not even with any consistency. At the end of the day, the harsh reality is that most hands-off investors (who use index funds and ETFs) end up far outperforming those who try to time the market.
The Culture Of Buying “Dips”
Now, even if you haven’t heard specifically about timing the market, you’ve heard about this. There is a huge group of people that love to champion the notion of purchasing tons of assets every time the market has a major or minor dip. This dip they refer to is a drop in the value of assets. So, in theory, you can then buy assets after the dip and make a bunch of money once the market “corrects” itself and the values go back up. When you’re talking about dips in the market as a whole, this strategy usually does work to varying degrees.
However, there are a few issues with it. First, you have to be sure you can buy before the dip ends. This shouldn’t be that hard, as long as you use an ethical brokerage for your investments (one that won’t throttle purchases). Second, you have to have cash handy, to use for these purchases. This is where things start becoming problematic. Third, if you had cash handy, why wouldn’t you have already invested it? If you sit on a large sum of cash, waiting for a dip, you’ll likely miss out.
Yes, you might be able to buy the dip and make money. Yet, if you had just invested that money routinely instead of waiting for the dip, you probably would’ve wound up making more over the long run. If you just sit on it while waiting for the “perfect” time to invest, you’re probably going to end up hurting yourself over time.
Don’t Buy Into It
Excuse the bad pun, but don’t buy into the hype of timing the market. Many people who do lose almost all of the money they put in, and a seldom few make any profit at all over the long run. Sure, you can get lucky and make some extra money here and there, but for the overwhelming majority of people you’re going to end up getting burned in the process. Focus on more traditional and easier methods for consistently making great returns. As a long-term investor, it’s not actually hard to make strong returns – and you don’t need to participate in some sort of collective gambling mentality.
Dollar-Cost Averaging
Dollar-cost averaging will be the best thing for most people who want to invest. Here is what you need to do in order to follow a dollar-cost averaging strategy:
- Automate investments
- Invest the same amount of money at regular intervals
- Increase the amount you automatically invest as you can, but do not change it based on guesses or predictions (i.e. as you make more money, use those funds to increase your investments)
That’s it! Much easier, isn’t it? Also, those who follow this strategy tend to outperform traders by huge amounts, and it is a much more hands-off approach. Not only do you perform better, but you have to waste less time dealing with it. To me that is a huge win and a no-brainer. It doesn’t have the appeal of gambling, or the rush you get when you make a big win, but over the long run you’ll end up making much more than your trading counterparts.
It’s About Time In The Market, Not Timing The Market
Timing the market is a dangerous game. However, the longer you hold investments in the market, the better you’ll do. It’s all about your total time in the market, not about trying to time your investments perfectly. Keep it simple and go with the approach that works. If you need more help on investing the right amount, you can read my article on it. I highly recommend using a brokerage like M1 Finance or Vanguard.
Conclusion
I hope you enjoyed my take on timing the market! I’m sure I’ve ruffled some feathers, as some people like to swear by it. However, I can’t in good conscience ever recommend someone try trading and timing the market – it almost always ends disastrously. If you liked this article, and my honest take, sign up for the Bitter to Richer newsletter to get more content like it!
