What is market timing?
The most sought after advice in the book is to purchase and sell high and market timing is an attempt to do the same old thing once more which is to sell when the market is high and buy when it is low.
Obviously, it is not that straightforward since the market timing in essence entails predicting whether the market will keep going the way it is predicted or make a turn up or down which is in theory easy but is difficult to attain in practice.
To sell or to hold?
The stock has since doubled in value in the past five years since it was officially held. But it is still not certain as doubles are high enough to sell or simply hold the stock in hopes for more gains.
Thousands of investors were able to buy Microsoft at $1x and felt good when they were able to sell them for $2x, only to see it surpass $10x after it was sold. On the other hand, many held that AOL at $2x hoping for a $10x only to see it drop less than $1x.
The main problem is that each and every investment decision decided will necessarily include; investing in the future and that the future is never certain.
Every investing post, book and article reveals among investors the two-fold dilemma. All of us are basically trying to ascertain on how to obtain the best future and some regard the rules or formulas which they presume to be controlling of future performance. Those may all potentially work some of the time and there is no such thing as a perfect indicator of the performance of any investment.
Despite the possibility that investors can make good on predictions, they still are constrained with the problem of a hold decision or a single sell option.
Timing the market accurately no matter what economists say is next to near impossible. It is best to forget the theory and all those academic studies since timing the market is practically a daily exercise which is a burdensome and tedious thing to do. Basically, the odds are against the trade which is even worse than gambling.
Below are among the common reasons why timing the market is difficult to do.
- There are a few reasons why it’s so hard.
- The future is near impossible to predict.
- No one has exclusively identified exactly which variables turn the market, up or down and predict the next turn.
- Some people have tried to fabricate computer programmes that won’t suffer from mental fatigue but the problem still remains to be unsolved.
There are several strategies people can follow to effectively deal with the dilemma of not knowing what the future would generally hold. None of which are considered perfect and consequently they all attract their share of criticisms. Digging deeper into the market timing issue seems to be an intricate question to focus especially on the selling high part. Most stocks, when the market plunges grow further once the market recuperates.
Therefore, there’s basically very little gain when traders try and sell high since it’s very hard to pick up right spot to sell. Purchasing low is much more feasible since the current stock are reasonably priced. It can result in a temporary drop in price much better than one with a higher premium price.
However, traders need cash to buy low and the best place to get the cash is selling high which for all intents and purposes very impractical. With that in mind, traders can either brave the possibility in timing the market or do the opposite. The primary question to ask is if the strategy can succeed for as long and as consistently as it can.