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.

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Tags: Market Timing, technical analysis