There are many investors and websites with trading systems designed to advocate that you can beat the market by timing your stock purchases and exits. That is the theory with day traders. They feel that by looking at the historical movements of a stock and where certain technical indicators are, the entry and exit points will be identified. To a small extent, this is possible but not for the long-term growth expectations of making a profit on stock investments.

The thing is that common stocks have volatile returns. That is why they have potential for better returns. Historically investors have suffered negative annual returns 27% of the time. If someone had a crystal ball and could without error predict the turnings of the stock market, they would be rich from their investments and the selling of advice. The truth is that no one has a crystal ball.

Roger C Gibson in his book “Asset Allocation” gives an example. Say in 1925 you found a person who had a crystal ball, so to speak. That is they could predict accurately what the stock market was going to do the next year. You follow their advice and at the end of 1926 your $1.00 investment grew to $1.12. Year after year you follow this market timers advice and never have any down y ears. By the end of 1998 your investment would be worth over $20 million instead of the actual best –performing investment alternative. Small company stocks during the same period had an ending value of $5117.

With this example, Mr. Gibson tried to point out that no one is able to predict accurately every Bull or Bear market. A great investment axiom is “hind sight is 20/20”. Meaning that it is easy to predict what the market or a particular stock is going to do after the fact. It is the before the fact decisions that are difficult.

Trinity Investment Management Corporation analyzed the nine peak to peak cycles that have occurred since 1946. They found that there were about 1.7 times as many up months as down months during this period. The average bull markets is up 104.8 percent versus the average bear market of -28 percent. Bull markets lasted nearly three times as long as bear markets and the shocker is that even in bear markets, there were on average about 3 – 4 up months out of 10 months.

A study by Robert H Jeffrey concluded “ No one can predict the market’s ups and downs over a long period, and the risks of trying outweigh the rewards”. He went on and commented “The rationale for being a full-time equity investor is not that there are more positive real return periods than negative ones in most time frames, but rather that most of the “positive action” is compressed into just a few periods, which tend to follow particularly adverse times for stocks”.

In another study Jess S Chua and Richard S. Woodward concluded “Overall, the results show that it is more important to correctly forecast bull markets than bear markets. If the investor has only a 50 percent chance of correctly forecasting bull markets, then he should not practice market timing at all. His average return will be less than that of a buy-and-hold strategy even if he can forecast bear markets perfectly”.

William F. Sharpe concluded that “a manager who attempts to time the market must be right roughly three times out of four, merely to match the overall performance of those competitors who don’t. If he is right less often his relative performance will be inferior”.

The conclusion then is the long term investor, which is what we should all be, should enter for the long run. Establish a good strong diversified portfolio and stick with it through the ups and downs.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.

Trying to grow your investment by timing the market is a difficult thing to do. Market timing is the strategy of using technical analysis tools and trend analysis to predict when a stock price is going to drop or rise. No one has a crystal ball and can not predict what will occur in the future. This is what makes day trading so difficult.

In 1975, William Sharpe published an article in which he demonstrated statistically that in order to benefit from a market timing strategy you would need to be correct 74% of the time. Another study has shown that between 80 -90% of the stock returns occur between 2% – 7% of the time. If you are out of the market, when the stock begins to move you may miss the ride.

During the 20 year period between 1986 and 2005, the S&P 500 grew at a compounded rate of 11.9%. However, the average investor’s portfolio grew only 3.9% during that time. The reason was due to attempted market timing.

What happens is that a stock that an investor is following begins to move. He has watched it drop down from its high to a point where he thinks he may purchase it. However it starts to move up and then before he jumps in, it has reached a point that in his mind has become too high to jump in. He has watched it drop before so he figures it will do so again. He ends up watching it climb and climb and he does not own it.

This happened to me with a stock. I owned 1000 shares at 7.00. It dropped and I felt lucky to get out after it had come back to 7.60. I then watched that stock climb to 50.00 per share. Market timing certainly did not work for me then.

Another recent example is Brigham Exploration (BEXP). It has grown from 1.00 in March 2009 to over 11.00 nine months later. It has grown through the finding and establishing of producing oil fields. The price of oil in 2009 certainly did not reflect the prices in 2008 so who would have predicted that BEXP would have done as well. In fact, if you looked at the technical analysis for this fund, you may have jumped out early and are missing the run.

It turns out that it is not timing that is the key but the amount of time you are in the market. American Century investments used Bloomberg and did a study of the period from 1990 to 2005. It found that a $10,000 investment grew during that period to $51,354. Apparently if you had missed the best 10 days during that 15 year period your investment would have been just $31,994 and if you had missed the best 30 days, your investment would have been a mere $15,730. While the long-term investors were making their money, the market timers were trying to figure what was happening and when to get in and out.

For most investors the safest course is to find good strong companies or mutual funds that fit your goals and risk pattern and stay the course.

Of course, that does not mean you should not do some technical analysis and try and find companies that appear undervalued that may be poised to move up sharply. Some companies or industries are good investments, they have just had an occasion to drop. My example above of BEXP is a good case. At one time it was trading at $18. It was still a good investment and jumping in around $3.00 or $4.00 after it had started its move would still have resulted in a nice return.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.