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Timing the market – or not
If only I had sold this stock last summer; if only I’d held onto that one three years ago. Just think of how rich I would be today!
Have you ever regretted the fact you didn’t time the market quite right? Well, if you have, you might take comfort in the research done by 1990 Nobel Prize winner William Sharpe, which shows that the odds are stacked against the success of "timing the market".
Why? Because from a historical perspective, the nature of market performance works against the market timer. That’s because bull markets last longer than bear markets. Because stocks go up more over time than they go down and because most upward performance occurs in unpredictable spurts
Sharpe’s research shows that market timers must successfully score at least two-thirds of the time for market timing to pay off.
To do as well as an investor who “bought and held” stocks, a market timer would have to be right at least 82 percent of the time. Unfortunately, such a hit ratio is way beyond the talents of most of us. That’s because the market does just as well when investors are in the market as when they are out of the market.
So don’t flog yourself. The next time you start thinking about what you “should have done,” change the channel. The key to investment success is not the ability to time the market but the selection of good stocks, and the patience to stick with them.
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