It isn’t uncommon to hear of stock market analysts claiming that an investor can actually time the market so that he only ends up investing in the bull periods. They claim to use market timing strategies so that they can anticipate when the bull markets come around, buy then, and then sell when the bear market swings around. Can you really time the market like this and eliminate any chance of a loss?
Let’s take a closer look at how market timing strategies work.
Most investors make some use of stock market indexes such as the S&P 500. The belief is that the hand-picked stocks listed on these indexes are somehow representative of all American stocks. Whatever direction the stocks in these indexes take, you can be sure that the rest of the market is going to follow those directions is that direction as well.
Over the last four years, the S&P 500 has fallen more than 12%. Whatever stocks you owned during this period, it’s likely that they fell by about 12% too.
What if you sold all your stocks right before the stock market crash of 2008, and stayed away from the markets until they began to pick up in 2009? You’d be a lot better off than those other saps who lost their fortune to the market crash. Even better, what if you short sold the bear market? You would end up with a 40% profit.
Of course, all of this depends on your ability to foretell what the market is going to do. There are all kinds of theories out there for why trying to gauge the market might actually be difficult.
The efficient market theory for instance tries to run with the concept that the entire stock market is usually properly valued because there all these traders who are on the job all the time trying to estimate how much value there is in each stock. If you subscribe to this belief that the market forces always make sure that everything is properly valued, you have to believe that market timing strategies are just not possible.
Mutual funds are usually able to protect the market a little bit sometimes. Here are these trained professionals trying to their best to time the market, and they usually only manage to make very small profits. This would be a good reason to accept that market timing strategies don’t exist.
And finally, when analysts try to test their theories in situations that occurred in the past just to see if they work, they often fail. They call this back testing.
There are a number of market timing strategies that the experts claim to use. They go by names like the revised FED model, and the CAN SLIM model. These certainly do succeed at at times.
Market timing strategies are not a slam dunk, by any stretch of the imagination. In the hands of an expert, they can be just as successful as other methods. No more.
