The Allure of Market Timing

With the market up more than 20% so far this year, many investors are wondering if now is the time to sell before an impending decline. While this may seem like a sound investment strategy, in reality it’s an expression of the allure of market timing—the idea that if we can pick exactly the right moments to sell and buy, we can ride the market’s highs and lows to profit and prosperity.

Buy low, sell high?

This well-known phrase summarizes the allure of market timing—and its prevalence shows how popular it has become. It sounds simple enough: To make money on the market, buy equities when they are priced low, and sell them when the price goes up. But when you try to put it into practice, this seemingly simple idea can become a Pandora’s box of uncertainty and second guessing where one decision leads to the necessity to make many more.

If we apply the concept of market timing to our current bull market, for example, the simple idea to “sell high” quickly dissolves into a series of further questions:

Should I sell now? I mean, really, right now? What if I sell now and the price goes even higher over the next several months? How do I know how much longer the bull market will last? If I sell, how will I know when it’s the right time to buy again?

So maybe I should wait to sell? If I hold out for prices to go even higher, what will I do if the market plummets? If prices start to fall, how long do I wait before cutting my losses and selling?

All of these questions arise not just once but every time an investor considers making a decision based on market timing, so that the challenge is not simply to “get it right” now, but to successfully replicate the process repeatedly over years of investment decision-making.

An alternative to market timing strategies

Basing investment strategies on market timing is tempting because the approach plays into our emotions, specifically the fear of missing out, the fear of losing what we’ve accumulated, and the desire to attain profits that can enable us to achieve financial security. However it can also lead to an endless cycle of questions for which there are no sure answers–no one rings a bell when equity prices are at their highest or lowest to signal the ideal time to sell or buy.

The alternative to the concept of market timing is a buy and hold investment strategy. This type of strategy prioritizes long-term planning and a steady approach that is designed to hold firm through both bull and bear markets to achieve success over time. Unlike market timing strategies which are short-term in nature and often emotion-based reactions to market fluctuations, buy and hold strategies are long-term and based on a proactive and intentional plan.

Jumping off the rollercoaster

Strategies based on market timing are alluring because they hold out the challenge and possibility of “outsmarting” the market to achieve quick and dramatic profits. However these strategies can also be fraught with uncertainty and lead to an exhausting exercise in futility as investors attempt to guess the exact timing of each successive peak and drop.

Investment strategies rooted in a buy and hold approach can offer a steadier, more purposeful, proactive approach based on long-range planning. Contact N1 to talk about how to trade a market timing strategy for a buy and hold strategy that can position you for long-term investing success.