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Why Market Timing is not a Good Investment Strategy



Market timing is the act of trying to buy and sell assets at the best possible time in order to maximize profits. However, market timing is a very difficult strategy to execute successfully.


There are a number of reasons why market timing is not a good investment strategy. First, it is very difficult to predict when the market will go up or down. Even professional investors with access to sophisticated data and analysis are often wrong about market timing.


Second, even if you are able to predict when the market will go up or down, it is difficult to time your entry and exit points perfectly. If you sell too early, you will miss out on gains. If you sell too late, you could lock in losses.

Third, market timing can be very costly. When you buy and sell assets, you incur transaction costs. These costs can eat into your profits, especially if you are making frequent trades.


For all of these reasons, it is generally not a good idea to try to time the market. A better strategy is to invest for the long term and ride out the ups and downs of the market. Over time, the stock market has historically trended upwards, so you are likely to see positive returns if you stay invested for the long term.


The stock market performance so far in the beginning of 2023 is a great example. After the difficult market performance in 2022, many may have given up and stopped investing or moved their investments to cash or other short-term safer investments. This may have caused them to miss out on some impressive investment returns so far this year. For example, please look at the following Table 1.


Table 1

Graphics and stock index quotes from global stock markets. Prepared by countryeconomy.com


As you can see through mid-May 2023, the global stock markets have performed well led by the NASDAQ returning 21.23% as of May 18, 2023. This is followed by the German stock market (DAX) that has returned 16.89% as of May 19th. With performances like these, stock market gains should not be missed by staying on the sideline when trying to time the market.

Ongoing monthly automatic investing is a better approach than trying to time the market. Please see the following example from Janus-Henderson Investors on how a small $50 monthly investment can grow over time.

This is a much better outcome than trying to time the market.

Here are some additional reasons why market timing is not a good investment strategy:

  • It is emotionally draining. Trying to time the market can be a very stressful experience. You will constantly be second-guessing yourself and wondering if you made the right decision. This can lead to anxiety and sleepless nights.

  • It takes away from your other financial goals. When you are focused on market timing, you are not able to focus on other important financial goals, such as saving for retirement or paying down debt. This can have a negative impact on your overall financial well-being.

  • It can lead to missed opportunities. If you sell out of the market at the wrong time, you may miss out on the opportunity to participate in the market's gains.

  • It can lead to underperformance. Studies have shown that investors who try to time the market typically underperform investors who simply stay invested for the long term.

  • It is not necessary. You can achieve your financial goals without market timing. By investing for the long-term and staying disciplined, you can build wealth over time.

If you are considering trying to time the market, it is best to reconsider. It is a risky and emotionally draining strategy that is not necessary to achieve your financial goals. Instead, focus on investing for the long term and riding out the ups and downs of the market. As Paycheck to Wealth’s founder often says: “In the Market Stay in and You Will Win”.

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