Why is 'Timing' the market bad ?

Let me tell you about my decision not to buy property when I first moved to London, back in 1999. Everybody told me the market had peaked, we were in a bubble, prices were higher than anybody had ever seen and I'd be insane to buy now because I'd be stuck in negative equity. I should wait until the inevitable correction and pick up a bargain at that point.

The "correction" finally happened in 2008 and consisted of properties flatlining for about six weeks before continuing to increase at the same rate as before.

I am typing this from a flat that cost me £450k, which I could have bought for £200k in 1999 and saved on 15 years' rent as well.

This decision was partly informed by a previous experience, buying in 1993. The market had crashed a couple of years earlier. It looked like it had started to go back up (hard to tell, pre-internet, and we were very young, but it seemed that way to us and those around us who were offering well-meaning advice). We bought a flat - a starter home, to move on from in a year or two. We duly put it back on the market about 20 months later. It finally sold in the summer of 1997, for 8% less than we paid for it. It was a total albatross round our necks and we'd have been so much better renting for an extra three years or so.

So that's what happened to me when I tried to call the bottom, and then the top, of the market.

Apply the same sort of thinking to stock markets and that's roughly, sort of, what people mean.

What if whatever you sell keeps going up in price? How do you know when it's reached the top?

I'm new here (been lurking for about six months and soaking up so much good information) so I'll bite. I think you are talking about two slightly different things, timing the market and protecting gains you have made. Timing the market is buying/selling/changing your risk profile based on what you think is going to happen in the market (or what some clever predictive model says will happen). The general view is that uninformed investors like you and me are likely to fail badly if we do that because we end up following the herd and making poor decisions. For example, you will find a lot of threads on here saying "There's a crash coming so will I be safe if I buy into VLS 40 rather than VLS 60? Or is VLS 20 the answer?" Much more sophisticated investors may have a better chance but the reality is IMO no one can second guess the market. Those that do are just lucky IMO. If your mechanistic model was so effective, everyone would be doing it!

However, I think you are asking a slightly different question which is about protecting gains you have made. If you have made a 40% gain in 3 years you have to ask yourself the question how will you feel if your portfolio drops by 20, 30, 40%? Can you take it on the chin and say I'll get it back within a few years or will it feel like someone has stolen your hard earned cash? If you are in the latter category and you go very defensive, how will you feel if the market continues to rise? And what are you investing for - the long term or the short term? If you are investing for the short term and have done well then maybe you need a lower risk strategy to protect your gains because many people feel an end to the bull market is likely at some point. But no one really knows. Are you happy to give up another 1 or 2 more years of 40% gains before the "correction" happens? And what if the correction is not that big after all?

My simplistic view is not to try to game the market but focus on my investment goals and my risk profile. My own situation is that I am retiring next year and have built up a very healthy SIPP pot (that is all I have apart from state pension). On a risk scale of 1 to 5, my rating is at least -1, so I would be absolutely devastated if that portfolio took a major hit in the next few years. Consequently I'm sitting on half of it in cash and am very happy with that situation because I know I have "protected" a lot of the hard work I have invested in getting that portfolio to where it is today. I won't need to touch the rest for at least 15 years so that can stay invested and weather the ups and downs of the market. Inflation is irrelevant for me at the moment and likely to be so over the next 4 to 5 years. I know I am forgoing potential gains on a big chunk of my investments and I am sure that more sophisticated investors than me would be able to increase that pot with an acceptable level of risk to them. But I am very content with my situation because it fits my risk profile and investment goals.

So I would say trying to time the market is a fool's game but understanding why you are investing, what your goals are and what your risk profile is are the key to helping you decide what you should do.

Also, OP, you set too much store by the power of a stop-loss.

Markets - especially in specialist areas - can swing very quickly indeed sometimes, so telling yourself you will sell if it falls 10% below a peak may simply be impossible. If nobody wants to buy what you're selling then the value could drop way below 10% down before you can action it.

Similarly on the upswing. Watching patiently for it to rise 10% from what seems to be the bottom carries a large risk of rebuying just before a further large fall, or finding the price has quickly risen way beyond the point at which you intended to buy.

Either way, the risks of buying and selling at entirely the wrong moment are very high indeed.

At the times when you would be thinking of buying or selling, things are very likely to be moving erratically. And fast.