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Why the Market Usually Leads, Making Market Timing an Unrealistic Approach

Because the stock market is a leading economic indicator, taking a strategic view when investing makes more sense than trying to time the dips and peaks

Many economists agree that the stock market is a leading economic indicator rather than a lagging or current one, as stocks tend to be forward-looking. The market leads by proactively factoring economic conditions like the Federal Reserve’s additional interest rate hikes, global conflicts, and supply chain issues into the pricing of securities. Nevertheless, some still challenge this view, seeing the market’s prices as a reactive “litmus test” of investor sentiment at a given moment. 

Both schools of thought tend to agree on something, however: market timing is an unreliable approach to investing. Market timing is a strategy that bases stock purchases and sales, or transfers between asset classes, on predictive methods. Active traders with access to specific data types can sometimes succeed using market timing, but it is not considered a consistent or sustainable strategy. And for most investors, this type of predictive maneuvering is ill-advised.

Strategic investors realize that rash moves driven by round-the-clock news coverage and diametrically opposed analysts’ predictions are mostly noise to be ignored. Carefully considered, long-term plans based on individual wealth management goals usually win over quick investing pivots. Investing today requires patience, research, resolve, and a willingness to overlook the temptation of “timing the market.” 

The illusory lure of market timing

To “win” when market timing, an investor must be able to predict market cycles accurately. Obviously, no one has this technique mastered because it is not sustainable or reliable. 

For many traders, market timing is not impossible, and it can be a profitable short-term strategy if they’re equipped with the proper data and skill sets. But few investors can succeed in predicting market shifts with enough consistency to equal the gains realized by “buy-and-hold” and “dollar-cost-average” investors over time.

Why is this the case? For one thing, historical data show that many economic downturns were not predictable, and for those that were, the extent of their impact was often misjudged. Most recently, the market volatility during the pandemic is a potent example of the dangers of relying on the market-timing approach to investing. The previous impact of the subprime mortgage crisis was also minimized in many market watchers’ forecasts. Both events gave investors little warning of the market disruption they would cause. 

Already “baked into the cake”

Investors trying to time the market — that is, buy or sell stocks based on how they believe economic conditions will impact the stock market — often find they are simply too late. Tying investment decisions to news items is flawed because the market usually reflects events before the average investor and has already factored them into securities’ prices. 

For example, by the time an individual acts in response to a negative jobs report or the Fed’s increase of interest rates, the market (investors in the aggregate) has already absorbed those conditions into valuations. Likewise, inflation, fuel prices, supply chain issues, and the war in Ukraine are events that have effectively been baked into the cake or reflected in the valuations of many securities. This is not to say the market is perfectly predictive or infallible; sudden shock events — such as a surprising, dramatic expansion of the war in Ukraine — aren’t typically factored into values. But many significant, knowable factors are.

So, it’s pretty rare that an individual investor has early insight into an event that will drastically move the market. And in many cases, acting upon that type of knowledge could be considered insider trading.

Time in the market

Investors worried about the performance of securities during inflationary times or periods of volatility may consider significant sell-offs. But many analyses show that it is often a flawed strategy. DALBAR’s Quantitative Analysis of Investor Behavior, an often-referenced study, shows that people who pulled out of the market during a volatile period missed some of the market’s largest gains shortly after. And in the words of Peter Lynch, “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”  

Similarly, we’ve recently seen the power of an internet meme and message board to drive rash investments in hyper-valued stocks that quickly hit bottom. So, highly active investors may claim that market timing can yield higher rewards. Still, these success stories tend to be limited and inconsistent, and some investors are always left holding the bag in terms of devalued securities. 

When looking at stock market indices historically, it’s noteworthy that the S&P 500 has performed well and remains a wise investment over the long term. Investors whose portfolios heavily reflect this index and other well-diversified holdings tend to rebound from momentary losses when their funds are kept intact over a sustained period. Also, “passive” investing is less stressful and time-consuming for most people and a proven means of amassing and maintaining intergenerational wealth.

Thus, there’s truth in the adage, “It’s not about timing the market, but about time in the market.” A comprehensive, consistent strategy that changes in light of an individual’s goals is superior to attempting to predict the immediate future or listening to people who claim they can. Because as Warren Buffett once said, “The only value of stock forecasters is to make fortune-tellers look good.”


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