Why Stock Market Timing Scares Us

Beyond Buy-and-Hold #35

Market timing is the answer. For those of us willing to engage in market timing, stock returns are highly predictable and thus stocks are a high-return/low-risk asset class.

But most of us are not today willing to do this. Most of us disdain market timing.

Huh? We have available to us a means of investing in stocks that offers much higher returns at greatly diminished risk and we are not interested? How could this be so?

Market timing scares us.

There are 10 reasons.

1. We Confuse Short-Term Market Timing and Long-Term Market Timing

Short-term market timing (changing your stock allocation with the expectation of seeing a benefit within a year or two) really does not work. Lots of us hear the word ?timing? when it is used to describe long-term market timing (changing your stock allocation in response to big price swings with the understanding that you may not see benefits for doing so for as long as 10 years) and have a negative reaction even though short-term timing and long-term timing could not possibly be more different. Short-term timing calls are based on guesses as to where stock prices are headed. Long-term timing calls are based on an understanding that paying attention to price is always be a good thing when buying stocks just as it is always a good thing when buying anything else.

2. It Takes a Bit of Effort to Note What Happens in the Long Term

We see short-term timing not working over and over again just by paying attention to stock market developments. To learn what happens in the long-term, we would need to look at the historical stock-return data. And what would prompt us to do that for so long as we maintain a generalized belief that ?timing doesn?t work??

3. We?ve Heard That There is Research Showing That Timing Doesn?t Work

There is a lot of research showing that short-term timing doesn?t work. There is no research showing that long-term timing doesn?t work; in fact, all the research done on this topic shows that long-term timing always works. That?s because short-term timing really doesn?t work and long-term timing really does. But when we hear that there is research showing that timing doesn?t work, we usually do not think to ask about the particulars. We jump to the conclusion that there is research showing that neither form of timing works.

4. We Are Social Creatures

Long-term timing would permit us to obtain far higher returns at greatly diminished risk and thereby to retire many years sooner. But during extended bull market most investors are not investing rationally (this is so by definition because it is not possible for stocks to become overpriced when most investors are investing rationally). Social pressures are imposed to keep those who are aware of the irrationality from speaking up about it. Most of us place a higher prioority on fitting in socially than we do in seeing steady growth in our retirement accounts.

5. The News Is Too Good to Accept

Tell someone trapped in a dead-end job that he or she has won the lottery and he or she is likely to break into tears. We all want to be happy. But most of us have a hard time letting in too much happiness all at once. The news that it is now possible to time the market effectively and thereby to obtain financial freedom many years sooner than was previously thought possible is shockingly good news. It?s going to take us some time to warm up to the idea. We fear that we are going to be made fools of if we put our confidence in the exciting new findings.

6. We Are Unclear on the Mechanics of Long-Term Timing

There?s a Catch-22 at work here. We cannot come to believe in long-term timing until we are clear on the mechanics of how to go about engaging in it. But we are reluctant to take the time to learn about the mechanics until we are sure that this form of timing works and that the mechanics are thus worth understanding.

7. We Don?t Trust Ourselves To Make Good Timing Decisions

If there are good ways to time the market and bad ways to time the market, a responsibility is imposed on us to take advantage of the good ways while avoiding the bad ways. For so long as we can continue persuading ourselves that all forms of timing are bad, we don?t need to concern ourselves with learning the difference between the good ways and the bad ways of timing the market.

8. This Is a Paradigm Change

If timing works, nothing we have long believed about how stock investing works remains true. All the old ideas about asset allocation need to be reconsidered. All the old ideas about risk management need to be reconsidered. All the old ideas about retirement planning need to be reconsidered. Radical change is intimidating even when it promises to take us to some very good places.

9. Few Talk About Long-Term Timing

The Stock-Selling Industry would prefer that we not learn about long-term timing. They make their money selling stocks so if it generally fine with them if we continue thinking that stocks are always best. Even many people not affiliated with The Stock-Selling Industry would prefer not to have to acknowledge the benefits of long-term timing after preaching for years that timing is not necessary or even that timing is a bad idea. So it is hard to get discussions started about the benefits of timing. And we can never come to feel comfortable doing something that we have not first talked about a good bit.

10. It?s New

People were afraid of airplanes when they were new. People were afraid of electricity when it was new. People were afraid of computers when they were new. It?s human nature to stick to the tried and true until forced to do otherwise.

Rob Bennett believes that Buy-and-Hold is dead. Rob?s bio is here.

( Photo from Flickr by Bobolink )

10 Responses to Why Stock Market Timing Scares Us

  1. By long-term timing, are you looking at company fundamentals and macro-economic trends?

  2. Thanks for stopping by, Robert.

    Thanks for stopping by, Robert.

    I advocate Valuation-Informed Indexing.

    With indexing, you don’t need to worry about company fundamentals or macro-economic trends. When you buy an index, you are buying a share of U.S. productivity. Purchased at fair price, a share of U.S. productivity is going to give you a long-term return of something in the neighborhood of 6.5 percent real. Or at least it always has, for as far back as we have records (1870).

    The only danger to Indexing is that you might be tempted to follow a Buy-and-Hold strategy. If you buy indexes without regard to price, you will sooner or later get killed. For example, a regression analysis of the historical data shows that the most likely annualized 10-year return for an index fund purchased in 2000 was a negative number. You obviously are not going to be able to retire when you would like if you invest a high percentage of your portfolio in an asset class paying a long-term negative return.

    VII is simple, safe investing. It always works. Why? It’s so simple, it’s hard to figure out a way to mess it up!

    The only thing holding most of us back from becoming highly successful investors is the hundreds of millions that The Stock-Selling Industry uses to promote Buy-and-Hold strategies. I favor the idea of opening up all internet investing boards and blogs to honest posting on the dangers of Buy-and-Hold. I believe that this is imperative given that many middle-class investors are investing in stocks as a means of financing their retirements.

    “Long-term timing” is taking the price of an index fund into consideration when you buy it, just as you take the price of cars or cameras or cucumbers or comic books into consideration when you buy them. It’s very, very basic stuff that dramatically increases returns while also dramatically minimizing risk. If only we could figure out a way to get The Stock-Selling Industry to direct some of its millions to promoting it!


  3. Too focused on stocks, even after a series of scandals, bailouts and everything we saw, see every day now. There a lot of other far simple, liquid investments other than stocks. Even with the dollar falling the way it is, I am out.

  4. The struggle is, if not stocks, what else, especially in an inflationary environment where bonds aren’t keeping track with inflation, and real estate is still overpriced. Commodities seem to be hot, but they’re the definition of short term timing. Currently, it seems like nothing, not even cash, is a winning strategy.

  5. Pete – You’re on to something! I think this is one of those times when we hang back and “keep the powder dry”. There are too many crosswinds that are making clear vision impossible. This is just my opinion, but at a moment like this one, any investment is a speculation. That’s when cash looks and feels real good!

  6. Even with the dollar falling the way it is, I am out.

    Thanks for sharing your thoughts, Alston.

    The middle-class investor has been done very serious harm by The Stock-Selling Industry. It may take decades for our society to recover from the economic and political trauma that is likely to follow from the industry’s extremely unfortunate decision to continue promoting Buy-and-Hold for 30 years after the academic research showed that there is precisely zero chance that it could ever work for the long-term investor.

    That said, I personally believe that it is a mistake to swear off stocks forever. If we give up the strong returns offered by stocks, we put off our retirements by many years.

    I think we need to build internet sites that permit honest posting on how stock investing really works. Using those places as beachheads, we could help millions. There are lots of people out there today feeling the pain that was brought on by the non-stop promotion of Get Rich Quick strategies. If we learned how to invest responsibly and realistically, we could make up the time we have lost. If we worked together to protect each other from those pushing the not-so-good stuff, good information would go viral fast and we would soon be looking at this economic crisis in the rear-view mirror.

    It makes sense to be out of stocks today. But I believe that we all need to be thinking about what we need to see to get back in. Something I would like to see is a general consensus that honest and informed posting on what the academic research says should be permitted at every investing board and every investing blog on the internet.

    I think it would make a huge difference. We don’t have to give up on our financial futures. We are not helpless. Or I should say — We are helpless only for so long as we think we are!


  7. The struggle is, if not stocks, what else?

    Lots of people are asking that question, Pete.

    I am working on a column entry titled “What Should You Invest in If You Are Afraid to Invest in Stocks?” That is #38, so it should be up here in less than three weeks.

    My best to you, Pete!


  8. I’d have to say that market timing does work. I used Fibonacci retracements to enter at the price I wanted which coincided with the near perfect time to get in. I think the problem is that many people don’t know how to use technical analysis to time the markets.

  9. People opt for the easiest, buy and hold is like buying a lottery ticket and have hope. The reality is that we must work hard to understand the markets and get the benefit of a good market timing. Few are willing to make the effort, so the buy and hold will always exist.

  10. GT–I think you’re right, buy-and-hold is like an investment default setting–the closest we come to investing automatic pilot. That’s a very poplular concept, especially amoung those who aren’t particularly investment savvy.

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