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When Does Market Timing Work?

Published -
July 15, 2020

The short answer is never!

I recently had a conversation with someone who told me his advisor (who works for a large national brokerage firm) would get him out of the market if Joe Biden wins the presidential race.  He said that his broker would be closely monitoring the election and if it looked like Biden had it locked up, he would get him out a few weeks prior.  The broker told this person the market would drop between 2,000-3,000 points if Biden won.

Even if the market were to drop and he got out in advance, the second part of the equation is when to get back in.  The typical thinking is “when things get better”.  Market timing requires the investor to get out at the right price and get back in at a lower price – which is very difficult.  And where do they invest the proceeds?  Bonds sure don’t offer much yield and cash is currently paying close to 0.0%.  Finally, what about the potential tax implications that this strategy would inflict when tax time comes around.

Advice like this is bad on so many levels. No one can predict news, and news is what moves markets.  One of the oldest tricks of the financial sales world is to convince clientele that the salesman can predict the future.  Not only is that entirely wrong, it ultimately costs investors billions of dollars in lost investment returns and excess fees.

History has shown us that people who employ (and those who recommend) these types of “in-and-out” strategies significantly underperform those who maintain discipline.  Studies have shown that most investors trail the broad stock market by between 4 - 6%.  As a result, many are not even keeping up with the rate of inflation.

Don’t just take it from me - here are some of my favorite quotes on market timing:

"We have two classes of forecasters: those who don't know-and those who don't know they don't know." (John Kenneth Galbraith, Economist)

"Any investment method that relies on predicting the future is doomed to fail." (Chandan  Sengupta, financial author and college professor)

"We have long felt that the only value of stock forecasters is to make fortune-tellers look good." (Warren Buffet)

"Market timing recommendations have an impressive track record of being harmful to an investor's financial health." (Peter Bernstein, author, researcher)

So the short answer, and the long answer, is that there are no times when market timing works as an investment strategy.  Work with an advisor who will help you determine the appropriate mix of stocks/bonds/cash and only change it when your life circumstances dictate so.

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