Market Timing is a Bad Idea
Most retail investors they don’t really have an understanding about the functionality of the stock markets or other asset markets. In theory the markets are going to be made up of people who actually understand the risks and the consequences of their decisions. However, in reality that’s just not the case at all. These are the reasons that market timing is usually a losing outcome and a really bad idea.
Probability of Failure
First and foremost is the probability of failure. Remember market timing is going to be a flawed strategy because of the number of decisions that are constantly having to be made. Two of the most important decisions is one regarding when to get in the market whereas on the other side the other decision is when to exit t or get out of the market. If you understand that what we’re looking at is a series of decisions, if we were to ignore some of the important details and just simply look at calculating probability there’s a 50 percent chance of getting one decision right and there’s a 25 chance of getting both decisions right therefore the likelihood that only one in four bets will make money and over time that starts to add up against you.
Many people who believe in market time they really just don’t have a clue that the odds are heavily stacked against them in reality there’s a small chance they’ll make a profit and if they actually do make a profit it ends up being lost in a future bet or wager. However, you want to look at it studies have repeatedly shown that retail investors who believe in market timing they tend to lose money almost with certainty.
Lack of Consistency
Next on the list is the lack of consistency. The myth of market timing comes into more visibility when some retail investors make money in a bull market. Remember it’s not hard to make money in a raging bull market, all you have to do is just be in the market. They do not realize that the rising tide lifts all boat scenario is taking effect and their bets are going to be right because of the macro market bullishness.
Timing the market with any sort of consistency is almost impossible even the best investors in the world they have a return percentage in the range of 25 to 35 percent annually so it’s weird to see that the average person can believe that profits of 5, 6, 7+% per day are even a possibility.
Constant cost of Transactions
Continuing, the constant cost of transactions is another reason that trying to time the market is a bad idea. People who believe in timing the market are very profitable for the brokerage firms. The more stocks or cryptos or commodities are bought and sold the more commission is paid to these firms. The commission is paid from the investor’s pocket regardless of the outcome whether it’s a profit or a loss. Also let’s not forget, the government takes a higher rate of capital gains tax on proceeds earned by trying to time the market.
Long-term investors do not have to face nearly as many costs as these short-term market timers. These costs constantly eat into whatever little profit they make and that starts to diminish the returns that are being generated if they’re being generated at all. and then
Next up, getting emotional and this is an important one because the strategy of market timing becomes even worse when emotional factors and reactions get mixed in. Retail investors are highly reactive to those emotions like fear, greed, and panic. They’re very sensitive to both profit and loss so their behavior is what creates short-term bubbles in the market. Retail investors are the ones that react the fastest to both greed as well as fear and as a result they buy when prices start rising and they sell when prices start falling which is the exact opposite of what should be done in the market.
Finally, is just the history being against market timers. In times of volatility timing in the market may seem tempting but doing so can end up being such a costly mistake. Market timing is not easily achievable so over a sustained period of time almost all investors profit more by simply making an investment and holding on to that investment as long as the core asset of the company is still in a place that made you invest in the first place.
It’s a lot easier to look down the long term and make long-term predictions rather than constantly making the short-term ones because large and long-term cycles like presidential elections and interest rate adjustments are a lot easier to forecast than the day-to-day month-to-month knee-jerk reactions of any given market.
The more obstacles, roadblocks and typical pitfalls you can avoid when trying to grow your money the easier it becomes to chart a path towards not only what you want to accomplish but also what is possible.