Market Timing – Should You Try To Time The Market?

Imagine for a minute that you’ve just been rewarded with a year-end bonus or received an income tax refund. But you aren’t sure whether or not to invest that amount because of the prevailing market condition.

Now, what would you do if you were to face this dilemma every year- sometimes when the market is up, sometimes when the market is down.

Actually, the cost of waiting for the perfect moment to invest usually exceeds the benefit of perfect timing. And since it is nearly impossible to time the market perfectly, the best strategy is to not time the market at all.

Instead, come up with a plan and start investing as soon as you can.

Follow a simple thumb rule of saving regularly, which will help you purchase both the expensive and cheap stocks and this will even out over time.

Let’s assume that you invested in S&P 500 on 1st January 2008 when the index was 1378 i.e., just before the financial crisis. It went down to 825 a year later. That’s an ugly loss of almost 40%. Two years later, the index was 1073, which still meant a 22% loss.

Five years down the line, the index rose to 1498, which is a plus, but it gives a modest CAGR of 1.68%.

However, had you invested on 1st January 2009, the CAGR would have been an impressive 16.65% after five years. This would have been a huge difference but not many knew that such a huge market correction was about to happen.

At the time of writing, S&P is at 4545 points, which gives a CAGR of 8.90% (if you bought 1st of January 2008).

This is quite impressive considering that you bought the stock just before a major correction. The return usually evens out over a period of 30 years.

Therefore, instead of timing the market and waiting for the perfect time to invest, invest whenever you can as in the long run, the cost of standing outside will be much higher than buying at the wrong time.