Timing the Market

Introduction

What does it mean to time the market? Timing the market is a strategy that a lot of investors try to do. They try to guess when a stock, or often the entire stock market, is at a low, where they buy, and at a high, where they sell. This sounds like a pretty common sense thing to do, since it maximizes your gains. I’m here to tell you to avoid doing this (what??). That might be surprising, but most experts agree that this is a bad idea.

What’s So Bad About It?

You’re probably thinking that I’m crazy for telling you to not try to buy at the lowest possible price and sell at the highest. After all, isn’t that how we make money? The issue is that it’s basically impossible to accurately predict a high or a low. This goes for both individual stocks and the market as a whole. Even professionals are rarely able to predict with any amount of certainty when these highs and lows occur. And to truly maximize your gains, you have to accurately guess both the high and the low, which takes an already impossible task and doubles it. More often than not, you will buy too late and sell too early.

Recessions

This becomes extra important in a recession, which is when the economy becomes really bad. Stocks typically crumble during these times. Recessions usually come after a period of very fast growth. What happens is that during these times of growth, people think that a recession will happen soon, so they sell in preparation for the collapse. And what usually happens? The stock market continues climbing, and these investors miss out on profits. Same thing happens when we’re in a recession. People think that a bottom is coming, so they start buying. What happens? The market sinks lower, and they lose money. Almost everyone thinks this way, including me. I have missed out on potential profits by trying to time the market. It’s a natural reaction. Don’t be like me.

What Now?

So if we don’t time the market, what’s the alternative? Let’s break down what you should be doing regarding buying and selling.

Buying

Regarding buying, you do want to try to buy at a decent price. This is called finding an entry point, and involves technical analysis. Yikes. I have a video on technical analysis, which you can watch under the courses tab. But it’s not a requirement to use it. In all honesty, if you’re doing good research and are confident in the long-term prospects of the company, the buy point isn’t all that important. What we really care about is when we sell.

Selling

Ok. Everything I’m going to be saying boils down to this. Remember the definition of investing. We’re holding stocks for the long term. That means, do your very best to not sell during any short-term fluctuations. That includes recessions. It will be very scary seeing all your holdings collapse during these economic downturns. However, although it’s hard, don’t sell your stocks. There have been many recessions already, and the economy has returned stronger than before every time. Holding through the recessions is the way to go, especially since your companies should have strong long-term prospects. If they are good companies, they will survive.

Conclusion

Everything in this article is probably very counter-intuitive. However, the essence is: Don’t try to guess highs and lows. Holding is always the best move. This strategy is supported by basically all the professionals, just in case you don’t trust the word of a random high schooler. Remember, we’re investing for the long-term. Don’t be scared of short-term occurrences.