Perfect Market Timing is Impossible, Here's Why
Can you predict the market? Are you one of those who like to predict where the market's exact bottom will be? We've got bad news for you: you can't time the market perfectly. We don't either.
You see, once you get your bonus or salary, you're not sure whether to invest right away or wait. Perhaps because the market has recently reached an all-time high, is on its way to an all-time low, or you are concerned that unexpected news will affect the market against your position. Imagine if you have to make this decision every year, sometimes in uptrends and sometimes in downtrends. Is there a general rule to follow?
A 2021 test by Charles Schwab compared five investment styles listed below:
1. Perfect market timing, investing $2,000 once a year at the lowest point.
2. Investing $2,000 per year on the first trading day.
3. Dividing $2,000 into 12 pieces and investing at the beginning of every month.
4. The opposite of number one, investing $2,000 at the highest point.
5. Left money in cash only, no investments.
According to the study, if you have perfect timing, you will come out ahead, but not by much. Numbers two and three were both within 11% of the perfect market timer. Even the one with bad timing came out with three times the amount after twenty years when compared to number five, who held their money in cash.
Source: Schwab Center for Financial Research. Invested $2,000 annually in a hypothetical portfolio that tracks the S&P 500® Index from 2001-2020.
If you still believe you can perfectly time the market, you'll be trapped in a never-ending cycle of either disappointment because you didn't catch the bottom or frustration because you never invest and you're just sitting there waiting for the market to crash even more only to find out that it has already recovered.
Let's play a quick game to see if you can perfectly time the market. I want you to slowly scroll down the page from now on so that you are not spoiled with the answers. Let's get started.
Is this the bottom of the market?
Nope, it crashed even more. Is this the bottom of the market?
No, it still isn't. What about this?
No, it still isn't. Perhaps this is still not the bottom?
So that is the bottom.
We can conclude from that exercise that accurately determining the market bottom is extremely difficult. However, if we look at the chart below, we can see that if we invest at any point on that downward trend, where we try to find the market low, we will still profit significantly in the long run. If you want long-term results, the timing of where you invest is unimportant. Furthermore, if you discovered the market bottom late and believe you have already been left behind by the uptrend, you would be frustrated. Picking the accurate bottom is nearly impossible, so we don’t recommend you try it.
So, what is the best approach here? Investing regularly and doing dollar-cost-averaging is the best strategy. People like to pinpoint where is the exact bottom, but it is hard to time the market. If you invest consistently over time, putting more money into your investments every month or quarter, you'll be able to catch a correction. You may still see negative figures in the short term, but because you are near the bottom, you will reap the best long-term results. We made a detailed article about that here (https://www.expatlifecoaches.com/post/how-you-should-invest-in-volatile-markets).
Astra believes that every client should receive the best available options on the market. Active management can help with that. Market timing is different from active management. Of course, we shouldn't wait till the portfolio's maturity term and completely ignore it. Active portfolio management focuses on finding high-quality investments that can produce long-term growth and income rather than trying to time the market. It also entails keeping up with market developments, economic conditions, and geopolitical developments that might affect the performance of investments. Active portfolio management also involves monitoring the portfolio's performance and rebalancing it periodically to maintain the desired asset allocation and risk level.
Active management is one of Astra’s core philosophies, it allows us to make informed decisions about investments based on a deep understanding of the markets, rather than relying on short-term market timing strategies that can be unpredictable and ineffective.
You can’t time the market; what matters is your time in the market.