Market timing

Market timing refers to any strategy that involves trying to predict future price movements and shifting between different investments to take advantage of them.

Market timing refers to any strategy that involves trying to predict future price movements and shifting between different investments to take advantage of them. To take a simple example, if you believe that shares are likely to fall and bonds to rise over the next month, you would buy bonds and sell shares. You would only intend to hold these positions for as long as you think bonds will keep beating shares: as soon as you think the trend will reverse, you would buy shares and sell bonds.

These predictions and trading decisions may be based on economic data: in the example above, you might believe that GDP growth will be much worse than expected and investors will dump shares because they fear a recession is coming. They could be derived from trends or patterns that you think you can see in price charts (known as technical indicators); you might think a bull market looks as though it is coming to a peak or that a bear market is near a bottom. Or they might be influenced by other major events, such as the threat of a war and the impact that you think it will have on markets.

All of these involve an attempt to predict not only what will happen and how it will affect asset prices, but when that will occur. If you get the timing wrong, you can easily lose money even if your prediction eventually turns out to be correct. 

That‘s part of the reason why market timing is so difficult, together with higher costs. If a buy-and-hold investor buys a stock that they think is cheap and their analysis is correct, they should make a profit, even if it takes longer than expected, as their costs will be relatively low. But if a market timer regularly changes their positions based on what they think will happen, they will incur higher costs. Unless their predictions are very often correct, these costs will eat into their profits. Studies suggest that most market timers do worse than buy-and-hold investors.

Recommended

Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
21 Sep 2020
Price to sales ratio
Glossary

Price to sales ratio

A company's market cap divided by the company's annual sales (or revenue) gives us the price/sales ratio.
28 Aug 2020
Too embarrassed to ask: what is a p/e ratio?
Too embarrassed to ask

Too embarrassed to ask: what is a p/e ratio?

Find out how to use the price/earnings ratio (p/e ratio for short) – a useful starting place for investors looking to value a company.
26 Aug 2020
Stock split
Glossary

Stock split

A stock split increases the number of a corporation's issued shares by dividing each existing share.
21 Aug 2020

Most Popular

How will we repay our vast debt pile? Do we even need to?
Sponsored

How will we repay our vast debt pile? Do we even need to?

In his recent articles looking at different aspects of the fixed-income investing world, David Stevenson looked at inflation. Today he looks at a clos…
19 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020