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Is it Possible to Time the Stock Market Consistently?

For investors buying low and selling high is one of the key components to success in the stock market. But is it really possible to time the market perfectly and consistently over time?

Is it Possible to Time the Stock Market Consistently?foto: Markus Spiske
Sebastian Shaqiri
created at: Fri Jul 16 2021| updated at:Wed Jul 06 2022

The theory of market timing

In practice, market timing involves shifting funds between assets. It applies to both taking a position in stocks with funds that were previously not invested, or shifting funds from another asset if another asset is expected to outperform the current holdings. There is no universal model used for market timing, instead, there are various different predictive models - both easy ones and mathematically challenging ones - where the purpose is to predict shifts in the market for the investor to reallocate funds in or out of an asset.

Disparities between academics and investors

Market timing is not anything that is particularly new in the asset management scene, and both investors investing for themselves and professional investors that invest for actively managed funds to some extent use market timing. However, most actively managed funds have a longer investing time span than, for instance, day traders, which most often mitigates the effect of market timing. Instead, business analysis weighs the heaviest, rather than perfect market timing. 

Most investors engaged in trying to time the market is using one of the following methods:

        Fundamental analysis: Examining firm accounting data and focusing on news related to the business

       ⋅ Technical analysis: Using historical data to obtain information about future movements, mostly by examining price charts

        Economic forecasts: Trying to use available data to make forecasts about future outcomes. 

However, not everyone is convinced that market timing is even possible. It is fairly well documented in the academic literature - this view is not only documented by academics, other investors and financial professionals also agree with this - that market timing is not possible, at least on a consistent basis over time. William Sharpe, a very famous man in the world of investing and Nobel prize winner, was one of the first who investigated the possibility of consistently market time in a manner that would beat a buy and hold strategy on a passive index fund. He found that, in order to consistently beat the index fund, investors had to time the market perfectly 74 percent of the time. This is notoriously hard, and a recent article by morningstar comparing actively managed funds, who focus on market timing, fails to even beat their corresponding passively managed index benchmark fund over a consistent basis, suggesting that market timing is not very usable in the long run. 

Why the disparities?

As documented it is notoriously hard to time the market consistently over time, but in the short run, it may actually be possible to time the market fairly successfully. Then why is there a disparity between academics and day traders? Well, the argument is fairly intuitive, neither predictive model presented previously in the text can predict the market with certainty; it is not possible to examine historical data in a chart and with certainty know that the market will increase in the coming days. From that view, predictive models give very little information about future returns and market timing. Naturally, the follow-up question then becomes, how do some investors trade successfully using these strategies? From an academic perspective, they would argue luck and point to the evidence of lack of consistency over time. However, if sufficiently many investors acknowledge the same market timing situation, the strategy may very well be successful since investors would invest their funds into a particular asset simultaneously which would increase the price, thereby confirming their strategy and segment their success in the market.   

So does market timing work?

In some instances, market timing can work, especially in the short run. Although, to be successful it requires time and significant analysis of different assets, which may be inconvenient for some investors. However, in the long run, the empirical evidence tends to suggest that a buy and hold strategy outperforms actively trying to time the market. 



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