Is Trying to Time the Market a Good Idea?

By: Edward J. Leach, CFP®, MBA

No - we haven't changed our minds. This is still not a good idea and a viable long-term strategy.

Why?

Although it might feel good in the short-term, market timing is doomed to fail. The odds of you making the right decision not once but twice is very low - when to get out, but then when to get back in.

When I was in college I purchased a radar detector for my car to help prevent me from getting pulled over if I happened to be driving over the speed limit. If anyone has ever driven on a New Jersey highway you might understand why this would be necessary.

After a few weeks of using the radar detector, there were many times when the radar would sound, alerting me of a potential police radar gun. However, most of the time it was a false signal and there was no police officer in the area. After some time, I started to ignore the alarm that would sound, because the majority of the time it was a false alarm.

One day I was driving down the highway and my radar detector sounded. I ignored the alarm as I tended to do because of its history of false alarms. This time, however, there was a police officer with a radar gun. The radar detector did its job, but because I ignored it, I was pulled over for speeding.

Back in September of 2015 a head of a major bank's technical research group put out a note that the Dow is in a massive "head and shoulders" top. Based on his analysis he would expect this top to be "more significant than the top in 2007". He also expected the fallout would be "one that should end below the 2009 low". (Click here for the Business Insider Article)

Well, here we are about 8,000 points higher than where we were in September of 2015. I cannot sit here and argue that the pattern that was appearing in the charts was wrong, but what I can argue is that investment decisions should not be made on signals that don't always lead to the predicted outcome.

The radar detector is a good example of a signal that is not reliably consistent. Had I slowed down every time the radar detector sounded I would have unnecessarily slowed down many times and extended my travel time. Like the radar detector, market signals are also inconsistent. Technical indicators, leading economic indicators, and market sentiment gauges are fun for the financial media to reference because they create great headlines. But history has shown many of these signals appear and fade away without any market impact.

If we took action every time one of these signals indicated a market correction was ahead, we would have been watching on the sideline as the markets roar higher.

Sure, there is bound to be a point in time when one of the signals coincides with a market correction. But can we tell in advance whether that indicator is a signal of market downturn or just another false alarm that we should ignore? The answer is no.

The stock market has a long track record of providing investors with positive returns. From 1926 through 2017, the S&P 500 posted positive returns in 68 out of 92, or 74% of, calendar years. So, roughly three out of every four years the markets are up - if you like baseball that is a .750 batting average. I will take those odds every day.