Buy low and sell high. It sounds so easy. Surely anyone who follows the market’s latest gyrations and stays abreast of economic and earnings news can anticipate and capitalize on these movements, right?
Wrong. In fact, as history has shown -- over and over -- trying to time the market is a losing game. Much research has been done on the topic. Stock market theorists and academics -- including industry heavyweights William Sharpe, Benjamin Graham and John Bogle -- have all come to the same conclusion: Trying to beat the market by timing its ups and downs is a roll of the dice.
Even the experts cannot predict consistently the market’s random walk. The simple truth is that nobody can guess the market correctly over time. Or, as John Bogle put it, “I not only have never met anybody who knew how to do it, I've never met anybody who had met anybody who knew how to do it."Some can make a good call now and then; others may even time both top and bottom in a given market cycle. But over the long run, the law of averages -- reversion to the mean -- will eventually win out, effectively rendering a market timing strategy a game of chance.
There is also human nature to factor in. People tend to sell in a panic at the bottom and buy in a flush of confidence at the top. Behaviors such as loss aversion, overconfidence, anchoring, and avoidance all enter into buy/sell decisions; adding emotion into what is already a chance call. And even if you correctly guess a good time to sell, when do you get back in? With rates on liquid, short-term investment vehicles still hovering near historic lows, the opportunity cost of staying out of the market can be significant.
So if you find yourself tempted by a market timing strategy, think again. Instead follow a well-coordinated investment strategy that is based on your personal risk tolerance and time frame.
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