The Dangers of Market Timing

by RJ

in Investing

2317065892_cb6ae77764Market timing is an investing strategy in which investors attempt to out gain the market by buying and selling securities based off their market predictions.

An easier way to look at market timing is that it’s the opposite of a buy and hold strategy. Instead of riding the market through its ups and downs and having faith in the long-term returns, market timing involves constantly buying and selling securities in attempt to beat the market.

The Dangers of Market Timing

For Gen Y investors, market timing is not worth the risk. Of course this is just my opinion, but I see many dangers for the individual investor to get involved with timing the market. The dangers of market timing include:

  1. Transaction Costs – If you’re trying to time the market, every time you make a trade, it’s another fee. One trade in a brokerage account will run you about $10. If you tried to time the market, you have to buy into the market for $10 and also have to sell out of the market for $10. Adding these fees up for multiple stocks, multiple times, takes a lot away from your overall return.
  2. Tax Inefficient - Once you sell a security for more than you paid for it, you have a taxable gain. Therefore, if you were to buy and sell the same security multiple times, you would have a taxable gain each time.
  3. Tax Document Overload – As a passive investor, I get little tax documentation at the end of the year. When I was young and over-confident that I can time the market, it was a nightmare at tax time. Sorting through 15 pages of my portfolio summary to get information was no fun at all. It costs me time and money because I had to pay for a tax preparer. This year, my portfolio summary was 3 pages.:)
  4. Information Overload - Timing the market makes you a slave to the news. The investors who succeed timing the market, (very few have succeeded) devote their life to market timing. Unless you have twelve hours a day to spare, you’re better off with a passive investment strategy.
  5. You Have To Be Right Twice – Market timing involves buying AND selling a security at the right time.
  6. There Are No Formulas – I have to admit, I enjoy watching infomercials that advertise a “proven system” to investing. If I had a secret, powerful, proven system to make millions of dollars, the first thing I would do is sell my system for not $500, not $400, not even $300, but 3 payments of $99.99. Don’t kid yourself, successful market timing doesn’t involve you sitting at the beach, sipping a cocktail. It’s a full-time job, with no guarantee of success.
  7. Miss Market Jumps – Nassim Nicholas Taleb in his book The Black Swan explains that the S&P, (the S&P 500 is the general benchmark for market returns) with reinvested dividends has returned about 9.5% over the past 30 years. However, if you were not invested during the 50 highest returning days, your total return is less than 1% for over 30 years! The market doesn’t move little by little, it moves by taking giant steps. If you miss out on those giant steps, which take place in a single day, you will lose.


When you add up these disadvantages, your chances to succeed are very small. Your best chance to succeed in investing, involves starting early, dollar cost averaging into the market, investing passively, and using tax advantaged accounts.

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VictoryNo Gravatar January 20, 2010 at 2:02 pm

This also pre-supposes that their exists markets which are both liquid and inefficient.

RJNo Gravatar January 21, 2010 at 8:52 am

@ Josh – I’m on the fence about technical trading. I beleive you can beat the market in the short term. However, once you factor in taxes, fees, time, etc… it gets harder and harder to win over the long term.

As research gets better and computers more powerful, there are some fund managers who have had a successful run the past 10 years. However, I would never tell someone who is just starting out that this is their best chance of success.

Josh OpinionNo Gravatar January 25, 2010 at 5:07 pm

What do you think is a good investment for GenY right now? I have been thinking about investing in some high risk index funds.

Josh OpinionNo Gravatar January 20, 2010 at 6:57 pm

What do you think about the concept of trend following practiced by many successful traders. While market timing is unpredictable and risky, they believe there are certain technical indicators which can help them in entry and exit.

JoeTaxpayerNo Gravatar January 21, 2010 at 4:42 pm

I agree. But of all the reasons, number 5 stands out for me.
How many geniuses who got out at 1500 (on the S&P) got back in yet?
Elaine Garzarelli called the August 87 top, and has lagged the market for 23 years…..

RJNo Gravatar January 25, 2010 at 4:17 pm

Thanks Joe. It’s always amusing when people brag on how they got in or how they got out of the market at the perfect time. They never realize that they have only won half the battle.

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