Two thoughts on market timing

July 31, 2020

Trying to time the market has a characteristic of a two-step dance: it doesn't really matter if you land the first step if you miss the second.

2020 offers an example. Say you predicted the harmful economic effect of the coronavirus in January or February and sold all positions into cash. This remarkable timing would have made you feel either quite smart or quite lucky. But there's a decent chance the March crash also made you feel quite frozen, and herein lies the problem.

If your goal was to outperform, to benefit from market timing, you needed to be correct twice in a row. You could not take the first step (selling) and skip the second (buying back in). In the 2020 scenario, if you missed that second step, the timing of which occurred just a month later, you accomplished approximately nothing. Well not nothing - you may have generated a tax bill from Uncle Sam.

An additional market timing problem: selling a stock, or an index, at the top of a bull market. You cannot predict the crest, and bull markets often will soar as they expire. As a result, if you sell too early, you can miss a substantial portion of the gain.

Selling investment positions tends to be harder than buying them. You may buy an investment, and it may go lower, but your error maximizes at 100% ¹. On the other hand, an investment could rise by hundreds of percent before it peaks. This mismatch highlights the difficulty of timing on the sell side.

Your best bet? Stay the course.

Dan Cunningham

1. Assuming it is not bought with leverage.