Why You Shouldn’t Try to Time the Market
There are several reasons why you shouldn’t try to time the stock market. The overall reason is simply that you can’t do it. Nobody can! In a 2018 study conducted by the International Monetary Fund, 153 recessions were analysed across 63 countries from 1992 till 1994. It was found that only 5 of the recessions were predicted correctly by the economists in the preceding year. The rest of the recessions could not be predicted in the period preceding their onset, by the economists.
In other words, you can’t tell exactly when the market will start slumping or, for that matter, when it will start going up. Here are some basic reasons for this unpredictability:
- The human element: Even if you develop a computer program or line up some technical analysts, you cannot time the market, almost always, simply because of the human element. On any news, good or bad, rumoured or confirmed, the market might move up or down, depending on the decision of the investors, stock-brokers or other stakeholders. For example, a whole host of institutional investors may invest or divest in a company’s shares bringing a sea-change in the share-price of that company. The decision taken by these institutional investors (or a large number of individual investors, as the case may be) may be based on just unconfirmed reports which may well be fully incorrect. And even if the news is correct, yet the market movement may well have defied the technical analysis or an algorithm to predict/ analyse the market.
- You can’t always be right: When you try to time the market, you are not only trying to assess when to get in the market, but you are also trying to assess when to get out of the market. This is like predicting the unpredictable twice over! In the case of the (stock) market, certainly the idiom doesn’t apply: “First time is a success, second time is luck, and third time’s a charm!”. It may well never get beyond the first time!
- Waiting is losing:When you try to time the market, you wait for the right time to enter or exit it. This may result in a long wait. In this period of waiting, you lose out on buying stocks which may have offered dividends. In other words, you lose out on the income yield from those stocks while you wait for the “right time”. Also, the dividend income lowers the buy-price, conceptually, of those shares for you.
Furthermore, by waiting for the right time, you are losing the time period you may well be invested in the market, thereby lowering your annual returns percentage, if you have targeted investing in the market over a period of several years.
So in the face of the above three reasons, it is perhaps best not to time the market. But then again, the question arises, what should one do instead. Here’s what you can do:
- Cost-Averaging: If you enter the market now and buy a stock at a certain price after which the market takes a dip, then you can buy a larger number of the same stock(s) at a lower price with the same amount of money. Later on, if the market falls further, you can purchase more of these stocks to average your cost further on the downside. This cost averaging will result in your portfolio to be consolidated with a lower price, until the market resumes its upward movement and you are able to sell your stocks at a higher price.
- Diversifying: If you have bought a stock of a company A at a certain price after which the market takes a nose-dive, then you can purchase stock(s) of company B (which may belong to another sector) which offers greater chance of capital gain or dividend yield. This way you are not only mitigating your chances of incurring a loss but are in-fact positioning yourself to earn a profit even if you have to sell the stock(s) of company A at a price lower than your buy-price.
- Investing for the long term: It is always best to invest in the market for the long term. This will not only cushion you from the market fluctuations, but will also help you to earn dividends. You can avoid losses and earn good returns by way of compounding and reinvesting. The buy and hold strategy is a win-win situation for you because it helps you ride the wave of the market and its vacillations.
Furthermore, by buying and holding the stocks purchased for the long term allows you to save your money against costs that can be incurred against daily or frequent trades. These costs can be in the form of commissions/ fees and other charges.
Concludingly, we can say that it is best for you to not time the market or wait till you think you can now enter or exit the market because there really isn’t a particular time which is the best time to enter or exit the market. It pays to buy now and hold, it pays to ride the wave of market for the long term, and it pays to compound and reinvest over a period of time while staying put in the market.