Dec 15th, 2007
What Not To Do: Market Timing
This past week on one of my favorite blogs, Get Rich Slowly, came discussion of the stock market, its fluctuations, and some question of whether it was time to buy in.
One of the great mysteries of modern times has been how to time the stock market, meaning knowing when it’s time to buy in and when it’s time to get out. The difficulty with this is the idea that it’s all that possible. Almost no one has shown that they can do it on a consistent basis, and one of the folks who was well-known for it with a long streak of outperforming the S&P 500, fund manager Bill Miller, now has another streak all but sealed up: two straight years of underperforming the index.
There are many others who try, sometimes successfully, sometimes not, to time the stock market. There are newsletters, books, and Web sites dedicated to doing it. One of the radio shows I listen to regularly is hosted by someone who talks about doing just that, although at least he tries to do it in macro rather than micro terms.
The difficulty in market timing is quite simple: the markets are unpredictable. When and how much they go up (or decline) is never known. It’s simple to say “buy low and sell high” but it’s very difficult to know when low is low and when high is high. About a year and a half ago I was looking at AAPL at being a bit below $60 and thinking it was a great time to buy in; yes, that was correct, but I could easily have looked at the stock early this year and thought it was time to sell. Certainly, it would have locked in a nice gain, but not nearly as nice as what’s happened since.
Wisely, J.D. over at Get Rich Slowly displayed caution on the market timing subject and pointed out, with help of a reader, that dollar cost averaging was likely the best thing to do. I agree with that; while mathematically dollar cost averaging doesn’t show an advantage over putting money into the market all at once, both in terms of performance and, according to some studies, risk reduction, it doesn’t necessarily matter. Even if the gain is mostly psychological, it can help the investor get out of the market timing game. In fact, in my opinion one of the most understated advantages of the 401(k) plan is its dollar cost averaging approach. It’s more important over the long run that an investor regularly put money away than it is for them to time the market. Even if it makes more mathematical sense to put $15,000 into the stock market on January 2 rather than $1,250 a month for 12 months, I know I don’t have $15,000 to do that very often. Doing it $1,250 a month (or $625 twice a month!) makes it a lot easier to deal with.
To answer the question, “Is it a good time to get into the market?”, as someone who believes in dollar cost averaging and a long term view, I simply answer, “it’s always a good time to get into the market,” and I do practice what I preach.
