Is it possible to successfully time the market?

Market timing is a strategy that always splits opinion, but can it actually work?

Is it possible to successfully time the market?

With outperformance difficult to achieve in the current markets, investors are faced with two options: accept the new reality and stick with a long-term strategy or try something a little different (or more risky). Timing the market is one method that ambitious investors have attempted throughout history with varying results. It’s a strategy that cannot fail to split opinion, but can it actually work?    

“Although the possibility for success at market-timing does exist, the probability of victory is slight,” says Senior Investment Strategist at Vanguard, Todd Schlanger. “On the other hand, a review of historical returns shows that investors who managed to avoid market downturns – even just a handful of the worst days – would have seen their returns improve compared with those of a static equity allocation.”

Every market correction is different in nature and all tend to be unforeseen. An investor needs to be able to both predict the series of events that will occur and then also predict how the market will react, keeping in mind that markets will be continuing to price new information.
Schlanger gives two recent political shocks – Brexit and the election of Donald Trump – to illustrate the difficulty of successfully timing the market. Before the referendum, experts predicted that sterling and UK assets would significantly decline if the country was to vote for Brexit. However, in reality, there was a modest decline and the markets recovered quickly. It wasn’t nearly the type of negative event that was expected. “The same thing happened with the Trump election,” Schlanger says. “Markets were rallying on the idea of Clinton being elected and then, when President Trump was elected, the market initially started to decline, but then it rallied and we are up significantly since then. It’s about getting the event right and then understanding how the market will react to that event. You need to be able to get both right to successfully time the market.”

Being able to identity and interpret complex market signals is the key challenge to successful market timing. Knowing the best time to get out of the market and then when to re-enter is hard to predict and, to make things even more difficult, bad days in the markets are often followed by good days and vice versa. “Historically, the best and worst trading days tend to cluster in brief time periods, often during periods of heightened uncertainty and distress, making the prospect of successful market-timing improbable,” Schlanger says. “Also, if you think about the operational and administrative challenges you might have as an advisor to move your portfolios in and out of the market - it’s a pretty daunting task.”

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