The Secret to Timing the Stock Market: Don’t
The Secret to Timing the Stock Market: Don’t
By Ian Arrowsmith, Managing Partner, CMFC®, CRPC® Scarborough Capital Management
Do you have that one friend who is always trying to time the stock market, analyzing the ups and downs of past performances to predict the perfect moment to strike? Do they approach investing the way TV detectives approach a hard case, with cork boards full of pictures connected by miles of red string?
Did it ever occur to you that this friend might just be a little… off?
Sure, there are certain pundits who swear “timing the market” is the key to making ridiculous gains. And there are plenty of people who believe it’s possible, especially among those who aren’t heavily involved in the market.
It certainly seems plausible that it just takes is the right insight, and presto! You predict when the market is about to make a big swing and rake in huge profits.
But the truth is that it’s no easier to predict the future of the market than it is to predict the future. There have only been a few successfully predicted bear markets over the past 100-some years; most “predictions” around market swings are actually just examples of a prognosticator getting lucky, and the “experts” are the ones who try to pass off that luck as skill.
No offense to your friend, but when it comes to investing, successfully “timing the market” is one of the biggest myths around.
Don’t Try to Predict the Future
You can look at the past performance of an investment to get a general idea of how it’s performing, but there’s no way to turn that into any sort of accurate prediction about its future earnings—and its future earnings are what will matter to you as an investor.
Performance indicators change all the time, and when a reliable indicator is actually found, it quickly leads to crowding that negates the potential benefit. In addition, the advanced models and simulations needed to create a reliable prediction are often so expensive that they cost more than the potential benefits to begin with!
Instead of looking for particulars, focus instead on broader trends. You can get a general sense of the direction a particular investment is trending, and use that to make an informed decision. Just don’t fall into the trap of focusing too much on past performances; you can’t make an accurate prediction about when an investment will reach an exact value, no matter how much research you do.
Remember, if investors could accurately predict how well their investments will behave, everyone would be a millionaire.
That’s why the best investment strategies are the ones that balance tolerable risk with potential gains. You want a portfolio that can be adjusted and corrected, and that relies on probability to earn you money over time without gambling on hitting it big with one well-timed transaction.
Play the Long Game
Patience might just be the most important part of a successful investment strategy. Make long-term investments that can grow steadily, rather than trying to time the market for short-term gains. Take the long view and approach your investments with an attitude that you won’t see results right away, but that your portfolio is growing.
Investing successfully is like growing an apple tree; it’s going to take years for it to grow and develop. If you plant one tomorrow, you wouldn’t expect to eat an apple from it the next day. The same is true of investments. Invest now, but don’t expect to see profits from your investments until far down the road.
By focusing on the long game, you’ll deftly avoid the most common pitfalls for inexperienced investors: panic and overconfidence. These are the major drivers of irrational investment decisions, especially when it comes to short-term investing. Investors with a short-term view are easily spooked by fluctuations and corrections in the market, and their decisions suffer for it.
Don’t fall victim to these common mistakes. Instead, set up a plan with a qualified financial advisor and stick to it. You’ll be more likely to end up with a diverse, long-term investment strategy that’s tailor-fit to your goals—and your risk tolerance. Just understand that you’re establishing a long-term plan, not chasing after quick gains.
A good investment plan will help set you up for success in the future, without the constant agitation and struggle of chasing trends. When it comes time to cash in on your investments, you’ll be glad you took this approach. Your friend, however, will probably still be chasing after that big windfall from one “properly timed” investment… and most likely chasing after a whole lot of lost money right along with it.