However, some investors can still profit from timing the market in a smaller and quicker way. If you are interested in tempting your fate with market timing, there are some scenarios that could work and might prove to be worth the risk.
What Does Timing the Market Mean?
Timing the market is a strategy in which investors buy and sell stocks based on expected price changes. If investors can predict when the market will go up and down, they can make trades to turn that market move into a profit. For example, if an investor expects the market to climb on economic news next week, they might want to buy a broad market index fund or exchange-traded fund (ETF) or single stocks that they expect to go up. They could also trade options (which give the right to buy or sell a stock at a set price), take a short position to bet that a stock’s price will go down, or use other tools to capture profits from market movements. While this strategy is great in theory, in practice it is almost impossible to make work on a consistent basis. Some investors hit it right every once in a while, but earning big profits from timing the market again and again is a pipe dream for most.
Making Decisions Based on Emotions
Recent research from Dalbar Inc. found that the average equity mutual fund investor earned a return of 26.14% in 2019 while the Standard & Poor’s 500 Index returned 31.49%. Based on net purchases or sales from each month of that year, the average equity fund investor guessed correctly whether to get in or out of the fund only three times out of 12. Investors typically underperform compared with the market as a whole because of emotional investing behavior, like jumping on a hyped stock when its price is high or overreacting to a single news report. “Buy high and sell low” is bad advice, but that is what investors do when they enter trades based on one piece of bad news or excitement over a soaring stock.
Taking Advantage of Small Market Dips
Predicting the timing of the next major market crash may be more difficult than winning at blackjack in Las Vegas, but that doesn’t mean you can’t make a profit when the market dips slightly. In 2016, the U.K. voted to leave the European Union, a move dubbed “Brexit.” The next morning, on June 24, the Dow Jones Industrial Average and Standard & Poor’s 500 Index fell sharply. However, by the end of July, the markets had more than recovered. The Brexit vote result would have been a perfect moment to swoop in, buy a broad market ETF, and sell a short time later for a quick profit. Major political events, economic statistics, and deal activity can all lead to market overreactions. Like Brexit, they may offer astute investors a chance at a profitable series of trades.
Jumping on a Stock Too Quickly
On the other hand, if you had bought Kroger at or near its June 16, 2017, closing price of $22.29, you would have had many chances to sell at a modest profit: The stock didn’t close below $22.29 until August 24 of that year.
The Risks and Rewards of Market Timing
If you have a knack for forecasting ebbs and flows in stock prices and can avoid having your emotions interfere with trading decisions, you may have your share of success through market timing. However, you will almost certainly find it is easier to make gains in your portfolio by buying and holding stocks over longer periods of time.
