Market Timing – Is it even Possible?

Market timing is a hotly debated topic which has left many individual investors wondering if it is even possible. The general response among the so-called “professional” advisors and investors is condemnation of the mere mention of such a notion. Market timing, they argue, requires a crystal ball to be effective. Perhaps my favourite quote comes from financial author and columnist Jane Bryant Quinn who stated, “The market timer’s Hall of Fame is an empty room.”

And perhaps they’re right… to a degree. After all, who knows what is going to happen in the markets today or tomorrow or the next day? Extend the financial “forecast” out a little further to the next month, quarter, or year and you’ll find yourself as trusted as the local weatherman. And, perhaps, herein lies the problem… 

Market Timing – Prediction or Preparation?

Market timing is often understood as “the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to PREDICT future market price movements” (Wikipedia). While you may find some who believe they have one eye on the past and the other focused on the future, most wouldn’t be so brash as to suggest they can predict the future. So, perhaps we need to simply redefine “market timing” before we attempt to debate the proverbial fly in the ointment.

I believe market timing is better understood not as the ability to predict future market price movements, but as the necessity to prepare for future market price movements. The difference is not as subtle as it might appear at first glance… after all, the first perspective really does rely on some type of “supernatural” ability to see the unseen. However, the necessity to prepare for future market price movements is not dependent on some type of clairvoyance; rather, it relies on an adaptable calculation of possibilities. Simply put, it’s the acknowledgement that we don’t know the future market price movements and, therefore, we’ll prepare for the possibility of a movement in either direction.

Preparing for Future Market Price Movements

Investors from all sides of the debate regarding market timing find common ground in their desire to prepare for future market price movements. Here’s just a small sampling of how strategies from both groups attempt to prepare for future market price movements:

• Buy-and-Hold – There is an underlying assumption that markets go up over time and, therefore, investors can buy fundamentally strong assets, adding to those positions when there are dips or corrections, resulting in a noticeable profit at a future date. Most advocates of the buy-and-hold strategy would admit there are occasions when it is best to sell a specific position and reinvest in a different asset rather than simply buying an asset and holding it forever, with no consideration to one’s stage in life and financial needs at that moment in time.
• Rebalancing a Portfolio – This is the process of realigning one’s portfolio of assets to a predetermined “weighting” of those assets. Say, for example, the predetermined asset allocation was 50% stocks and 50% bonds. If the stocks performed well during a period of time and now accounted for 70% of one’s portfolio, the strategy would suggest that 20% of the stocks be sold and reinvested into the bonds.
• Technical Analysis – Often advocated as a discipline, technical analysis uses market data (primarily price and volume) of past movements as well as current trends to help understand the strength of current and future price directions of assets. Entire schools of thought and investing revolve around trends in market price and the ability to respond appropriately to when those trends are revealed.

Every investor shares a common strategy with various nuances. The basic mantra to buy low and sell higher remains the nucleus of any definition of successful investing. The debate unfortunately is misplaced…

Preparing for Market Conditions is Possible

I believe market timing is better understood not as the ability to predict future market price movements, but as the necessity to prepare for future market price movements. So, rather than debating the absurd, namely whether or not anyone can accurately and consistently predict market price movements, let’s focus on what is possible. Wise investors prepare for market conditions, whatever those market conditions may be at any given time.

In the days ahead, we’ll look at some examples of how market timing can positively (and negatively) impact an investment portfolio. Then, we’ll explore how the average investor can successfully prepare for market conditions, thus timing the markets! So, join us as we move beyond the hotly debated topic into a constructive discussion of how you can invest in the markets in a timely manner!