Market Timing
“Market timing” is just investment jargon that means trying to decide where a market or a particular security currently is, where it may be going, and when. Trying is the key word.
Market timing, including all forms of charting and "technical analysis," doesn't work because nobody can predict the future, period. The future prices of stocks, asset classes, or any market (e.g., interest rates), can not be predicted from charts of past prices, wave theories, econometric models, historical trends, computer programs, statistical relationships that worked in the past, or any other method. Markets move in response to millions of participants acting on random daily news, which can't be predicted.
To win at the market timing game, one needs to be correct more than 75% of the time to break even with mistakes, transaction costs, and taxes1. Because few people have shown a consistent track record of being correct even more than they are incorrect, this practice is an exercise in futility. Only one in four timers beats the market two years in a row, and only one in eight three years in a row2. Results of empirical studies also show that only one in 37 mutual funds showed any benefit from market timing.3
The main reason market timing doesn't work is because you have to make four decisions every time it's used. You would have to be correct in four calls to make high enough of a return to justify the risks. First you have to pick what's "up" (and will go down in the future, or why sell it?) for the sell decision to raise the money to buy what you think will go up in the future. Then you need to know when to sell it. Then you need to know what's "down" (and will go up in the future, or why buy it?), and when to buy it. All it takes is to be wrong on one of the four calls to wipe out the profits from other three calls. The chances of all of this netting out to a profit after taxes and trading costs are slim to none (and Slim left town).
If someone could market time with as little as 65% accuracy, they'd be on the front page of every newspaper every day, and there would be more than just a handful of firms practicing market timing. Everyone you see on TV, or in magazines/newspapers, predicting the future is just guessing. Some are just trying to convince you to buy the stocks/asset classes they just bought so they'll go up, and they can sell at a profit. Why else would their clients, who are paying stiff fees, tolerate their manager going on TV and giving away free advice they have to pay for? It's their job to convince you they can predict the future so they can move their products and sell their services. Over time, their "mistakes" will lose you way more money than their lucky calls will make you money.
This is all you need to know about market timing, technical analysis/charting, and what to believe from the financial media (when it comes to predicting the future) to be a successful investor! _________________________________________________________________________________________
1: The New Finance, Robert A. Haugen, page 13 2: Managing Investment Portfolios, Donald L. Tuttle Chapter 13, page 36 3: Modern Portfolio Theory and Investment Analysis, Edwin J. Elton and Martin Gruber. Page 653
