Should You Try to Time the Market?

In the long run, steady investing will help you build wealth and grow your retirement nest egg — if you’re a 20-something or 30-something, you can be reasonably sure that the stock market will be worth more when you retire than it is now. The reason for that is pretty simple: When we look at things in the long term, the stock market tends to go up.

But what about the short term? Well, it’s not quite as sure of a thing. When we look at the stock market over shorter periods of time, we see a lot more uncertainty. Markets can crash and lose incredible amounts of value in incredibly short periods of time. It can take years to recover from such a dizzying crash. Take the 2008 financial crisis, for instance. Stocks bottomed out in 2008 and only hit record highs again in 2015. That’s a long time to wait to just get back to where you were before!

But stock market crashes can also create opportunities. If you bought a bunch of stock in 2008 after the crash, you’d have enjoyed the fruits of that long recovery. The S&P 500, a broad and popular market index that tracks the performance of large companies, doubled in value between 2008 and the record highs of 2015. Seven years is a long time to wait to make your money back, but it’s a pretty short time period to be doubling your money.

And then there’s the ultimate risky move — rather than buying stocks after the crash, you could actually short-sell them before they crash. The famous “big short” of the 2008 financial crisis made a fortune. Of course, the risk involved was spectacular, too.

The techniques that people use to try to anticipate big market movements — things like shorting the market, selling out stocks and waiting until after a crash to buy back in, buying lots of stocks in the hopes that the market is at its nadir, and so on — are collectively known as “timing the market.” If investors time the market properly, they can make a fortune. But, of course, getting the timing wrong can mean big missed opportunities and even huge financial losses. Is it worth it?

Who should time the market?

Whether or not anyone should try to time the market is an endlessly debatable question. But there are perhaps better questions to ask: Who, if anyone, should try to time the market? And who shouldn’t?

Timing the market is not something that casual investors want to do. If you’re just collecting a salary, saving money, and investing with the goal of creating a nice retirement nest egg, then slow and steady is the way to go. Invest in broad, diversified holdings like index funds and target date funds. Invest steadily, and keep putting your money in during good times and bad. Because the market tends to go up, you’ll be in good shape a few decades from now. And because you’re not timing the market, you won’t have to worry about blowing all of your savings. You’ll weather market downturns with everyone else, but you’ll be sure to enjoy the good times, too, and the big picture will look rosy, if not particularly exciting.

If you’re an aggressive investor — such as a day trader — you might be looking at a different story. You should, of course, have a nice retirement nest egg in addition to your day-trading funds (and it should look like the one we described above), but your day-trading cash can be put in riskier spots. That means you can trade on market movements.

Still, timing the market is tricky, and there’s a lot to worry about — even the professionals and financial institutions have trouble pulling it off. You may be better off trying to time individual stocks and funds. Using momentum trading strategies, you could anticipate the high and low points of investing in vehicle price movements. And because you’d be dealing with individual stocks, you could spread out your risk. Using momentum strategies on individual stocks doesn’t put you in an all-or-nothing position like trying to time the whole market does.

Generally speaking, the more professional and experienced of an investor you are, the better equipped you are to try bold moves like timing the market. The risks are big, but the profits can be big, too.