Timing the Market

Timing the market refers to attempting to make money by predicting the future, correctly guessing and selling when the market is about to go down, and buying when the market is about to go up. It's an extremely risky game, and one neither you or anyone else is likely to win. While in theory it may seem possible to spot up or down trends, you never know what tomorrow's news may bring. Stocks my rocket up when it seemed they were going to drop, or fall when it seemed they were going to rise. Even when initial guesses are correct, how long will they remain correct? How do you know how long to hold a stock, when to sell again, and when to buy?

Even if you're not trying to time the market on a daily basis, it is tempting to pull out when the market crashes and get back in when it's rising. But there are serious problems with such attempts. Many investors that pull out during a crash end up pulling out at the bottom of the crash, and miss the gains of the recovery. They cement in their losses by selling at the lowest possible point, and the only way they can buy back in is at higher prices after the recovery. It's at least equally likely you'll lose money by trying to time the market, and chances are you won't be able to beat the market average. Staying in the market is the best way to capitalize on the long term gains.

There are a multitude of studies and analysis regarding market timing, the most well known published by William Sharpe in 1975, "Likely Gains from Market Timing". In this paper he determined that in order to make more money than simply staying in the stock market, the market timer would have to correctly guess future trends 83% of the time. His study was based on either being fully invested in stocks or fully invested in cash. Others have argued this number is flawed since investors are likely to be more diversified, but even considering diversification the number is close to 75%. Because it's highly unlikely that anyone can predict the market correctly 75% of the time, a much safer investment strategy is to diversify and invest for the long term.

What About the Elliott Wave Principle

There have been numerous mathematicians and scientists that have tried to create methods of analysis and formula to predict the markets, the Elliott Wave Principle being one of them. His idea was that market prices alternate between various waves or patterns based on prevailing optimistic or pessimistic sentiments. Again, the problem is that no one knows when a wave will begin or end. So even with this theory you're still left trying to guess the future. Additionally, critics argue that if markets were able to be predicted, the fact that investors would act on these predictions would instantly change the markets, making the predictions useless anyway.