Market Timing: Smart Strategy or Fool’s Game?

As a financial advisor, I regularly tell my clients, “Don’t try to time the financial markets.”

Let’s start with the definition.

Market timing is a strategy by attempting to predict  when to buy assets near the bottom and sell them near highs. 

This is the opposite of the buy and hold strategy. Sound simple to do right? Wrong. The problem is you don’t know at the time if it is a bottom or a top, or which direction it will go next.

With more dramatic highs and lows over the last 15 years, more investment experts are saying timing can be a useful tool. Many of these professionals disguise their market timing strategies as “tactical money management”. It is a highly aggressive style of asset allocation that should still not be utilized.

One of my biggest problems with market timing is that it is rather difficult to implement. Clients often look to me and think that I saw the next correction coming. Well first, my crystal ball is in the shop, so I can’t make those predictions. Second, if I did this every time the market drove higher, there would have been many instances where those same clients would be upset that I sold too early! You have to be able to get in and out at the right time.  

Doing this successfully over time is the challenge. Some investors and advisors get it right one or two times, but not over 10 or 20 years consistently.

Many investors believe market timing means subtle changes in your portfolio allocations, adding to something that has dropped and decreasing holdings in assets that have risen. A better suggestion would be to keep a range in your allocation. In other words, let’s say your target allocation for stocks is 60%. You could change that from say 50% to as high as 70% depending on whether you want to be defensive or opportunistic. Use a written investment policy statement to decide these numbers in advance. A portfolio mission statement if you will.

Whether market timing is ever a viable investment strategy is controversial. Some may consider market timing to be a form of gambling based on pure chance. I agree. At best, it’s a fool’s game.