Why Timing the Stock Market is a Bad Idea
Timing the stock market is a tale as old as … well, the stock market. But even though it’s a common practice, that doesn’t mean you should do it. Here’s what you should know about timing the market and why it’s typically not a good idea. Also, see some tips on how to invest if you’re still interested in day trading.
What does it mean to time the stock market?
If you’re looking to make money off the stock market, there’s a simple concept to follow: buy low, sell high. But even with this straightforward strategy, predicting those perfect “low” and “high” points is a hard task. Some market experts dedicate their whole careers to it – and even then, they may be hard-pressed to surpass the average S&P 500 return. Timing the stock market is just that: trying to predict when a share price will be the lowest and buy in, and then trying to predict when it will hit its highest point and sell off. The goal is to profit as much as possible and beat the average annual return.
How do people time the stock market?
There are lots of different ways to time the stock market. Some day traders study past market data and try to identify trends with particular stocks or asset classes. Others make their forecasts based on company success – for example, a better-than-expected quarterly earnings report may lead traders to buy shares of a company, as they’ll expect the stock to climb shortly thereafter. Still, timing the market is far from an exact science. In many cases, trading decisions are made based off premonitions or feelings in the moment. A prime example of this is the rise of “meme stocks” – or stocks that gained traction because they went viral online. Share prices of meme stocks are driven by social media hype, or hive mind, rather than company reputation or success. And timing a meme stock may prove even trickier than the average stock, because as quickly as they take off, the share prices of meme stocks can come crashing back down.
Does timing the stock market ever work?
The short answer is yes – timing the stock market does sometimes work. But they key word is sometimes. In most cases, good stock market timing is fortuitous – as much as you can attribute to skill, there’s an equal amount of luck that made it happen. One way that investors can boost their chances of timing the market correctly is to shoot for smaller wins rather than a jackpot. The fact is, guessing the lowest low point and highest high point is going to be virtually impossible. It may be something you pull off once or twice, but attempting to do it on a regular basis is why many day traders underperform the market. Instead, keeping that “buy low, sell high” mindset and buying in during small market dips may lead to more overall success.
The stock market is much more predictable in the long term
There are a couple of reasons why it’s more advisable to invest for the long term rather than trying to time the market. For one, short-term stock trading costs you in taxes. If you own shares for less than a year, any profit you make on them is taxed as short-term capital gains – the same as regular income. This can push you into a higher tax bracket or even make you ineligible for certain tax deductions and credits. Another reason is that it’s just hard to beat that 10% average annual return. If you’re taking risks left and right as a day trader, any big wins you have will likely be mitigated by losses. As the saying goes, slow and steady wins the race. By the end of a year, the risk-adjusted long-term investor is more likely to hit that 10% profit. However, nothing is guaranteed in the stock market, and a year is still a short time to measure long-term goals.
A little day trading isn’t bad in moderation
Investors who are turned off by focusing solely on the long term may be wise to diversify their portfolio with a mix of reputable value stocks and riskier growth stocks. There’s nothing wrong with having both short-term and long-term investing goals and mixing some day trading into an overall well-balanced portfolio. But if your stock market strategy revolves around timing the market, you should make sure that you can afford to lose the money you’re investing.
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Article initially appeared on chase.com
Credit: chase.com, WSJ.com, NYSE
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