The Case Against Market Timing
There are investors who try to time their investments to take advantage of short-term swings in the market. They attempt to buy stocks just before they rise, and to sell just before they fall. Unfortunately, this practice — called market timing — can be a quick route to big losses for the majority of investors.
No one can reliably predict which way a stock will move over the near term. (The exception is a company insider who has information unavailable to investors; that's why insider trading is prohibited.) And even if you were lucky enough to make a few successful calls, the odds are against you over time. That's because the majority of gains in most stocks are due to a relatively small number of "up days."
A sobering example
The chart below illustrates the risk of attempting to time the stock market over a recent 20-year period. It illustrates two investment strategies for $1 invested in S&P 500 stocks from 1985 to 2005. The bar on the left shows what happens if the dollar is left alone for 20 years. The red bar shows what happens if that dollar had been "market-timed" out of the market for the 17 months with the highest returns.
Past performance is no guarantee of future results. Indices are unmanaged and not available for direct investment.
In other words, just 17 out of 240 months were responsible for 75 percent of the potential gain. Miss any one of those 17 months and your returns start decline. That makes the odds of picking the right months to market-time almost impossible
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