One of the most important investment lessons you will learn is that you can’t time the market. Unfortunately, too many investors think they’re an exception to this rule, especially in the early years of investing.
Some people time markets for a career. Fund managers are forever issuing notes explaining why now is the time to buy, say, technology start-ups, defensive blue-chips, emerging market debt or German bunds.
Many private investors do it out of fear. A few more bombs go off in the Middle East, the Baltic Dry Index flashes red, or US central bankers hint at a base rate hike, and they sell in advance of the anticipated crash.
Sometimes they get it right. Usually not, though.
Nine Times Loser
The law of averages suggest you should time the market correctly at least half the time, but for some reason it doesn’t work that way.
Whenever I tried timing the market, I called it wrong around nine times out of 10. It seemed to take delight in doing exactly what I didn’t want it to do.
The stock market is a proud and capricious beast. It doesn’t like people trying to second-guess its movements.
So please, don’t try.
Don’t Kid Yourself
Here at the Fool, we are tough on market timing, tough on the causes of market timing.
The causes are naivety (I know what’s going to happen next), short-termist thinking (I’ll make a quick buck) and vanity (I’m clever enough to call this right even though no-one else can).
The result is usually failure.
Yes, some people get it right, but they are the exception rather than the rule, and that’s why we remember them.
Few repeat the trick.
Timing Isn’t On Your Side
The last week has confirmed, once again, that trying to time the market is a mug’s game. At the start of last week, the FTSE 100 seemed primed for the long-awaited correction.
The march of Isis, bloodshed in Gaza, confrontation in Ukraine, deflation in Europe and slowing earnings in the US could only mean one thing: trouble.
Everybody agreed on that. Then, with the FTSE 100 down almost 5% on its year-high of 6878, a strange thing happened. It delivered five consecutive days of growth instead.
Isis, Gaza, Ukraine, Europe and the US hadn’t gone away, but sentiment had shifted. A few bombs from the US, a few slightly soothing gestures from Vladimir Putin, dovish words from the Fed, and all was right with the investment world.
One day, everybody is sad and scared. The next, they’re happy and free. Nothing much changed in between.
Nobody could have foreseen that.
Hindsight Is Better Than Foresight
You can’t predict the next market movement, but you can take advantage of movements that have already happened.
The FTSE 250 is currently down 6% from its year-high of 16,728. It yields 2.6%, and is valued at 18.4 times earnings. The index may fall further, it may climb higher, nobody knows.
The only thing you can say for certain is that you are buying the index 6% cheaper than in February. It doesn’t take mystical foresight to see that.
If it subsequently falls another 5%, well, you can always buy more.
Time, Not Timing
Or you could buy a FTSE 100 tracker, also tempting, with the index trading at an attractive valuation of 13.6 times earnings, and yielding 3.43%.
Then all you have to do is hold it for the long term. Eventually, stock markets will be much higher than they are today, and you will make money.
Naturally, I can’t tell you when that will be. You just have to give it time.
