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  • FIRST POST
    • SteveG787
    • By SteveG787 14th Mar 17, 4:58 PM
    • 36Posts
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    SteveG787
    Why is 'Timing' the market bad ?
    • #1
    • 14th Mar 17, 4:58 PM
    Why is 'Timing' the market bad ? 14th Mar 17 at 4:58 PM
    Like many people I have made a pretty good gain in my funds over the last few years and have been looking at ways of protecting that gain when the market inevitably turns. On this forum and in other places people say 'Timing the Market' is a "bad" thing, but I am not sure why. As a former engineer my method would be a simple mechanical buy and sell process applied to each fund, if it drops from its top price by more than say 10% then sell, when it rises more than a similar amount above it's low price then buy.
    As far as I can see the only problem with this would be if the market turned just after I'd bought or sold in which case I would be left behind and catching up would cost more money.
    Obviously this would cost money while in cash and if catching up is required, but I am starting in the position of already being well ahead of the curve (about 40% gain in 3 years).
    The intention of this is to protect capital while holding on to much of the gain already made.

    Please poke holes and rip to shreds. I realise this is more than likely a bad thing but I'm not seeing it.
Page 1
    • Snakey
    • By Snakey 14th Mar 17, 5:42 PM
    • 959 Posts
    • 1,164 Thanks
    Snakey
    • #2
    • 14th Mar 17, 5:42 PM
    • #2
    • 14th Mar 17, 5:42 PM
    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.
    • ischofie1
    • By ischofie1 14th Mar 17, 5:44 PM
    • 142 Posts
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    ischofie1
    • #3
    • 14th Mar 17, 5:44 PM
    • #3
    • 14th Mar 17, 5:44 PM
    Trying to time the market is a road do dissaster.
    What if you pulled in to cash now and the market ripped another 25% in 12 months.
    You'd be sat in cash watching the party & at some point you'd jump back in.
    Whoops...the crash starts now & you're 25% down from if you'd have sat tight.
    To time the market you need get 2 timings spot on...When to cash out and when to get back in. Either of these are difficult to get right, to get both right is very difficult.
    Regarding the idea of jumping in and out of the market at set % drops/gains:-
    Go to the Vanguard website.
    They have a tool where you can pick your own maket exit/entry points based on selected % loss/gains.
    In graph format it the shows how it would have performed again staying in the market throughout.

    The results of the graph will be an "eye opener" for you.

    Regards.
    • TCA
    • By TCA 14th Mar 17, 5:48 PM
    • 1,268 Posts
    • 707 Thanks
    TCA
    • #4
    • 14th Mar 17, 5:48 PM
    • #4
    • 14th Mar 17, 5:48 PM
    What if whatever you sell keeps going up in price? How do you know when it's reached the top?
    • Freecall
    • By Freecall 14th Mar 17, 5:53 PM
    • 1,039 Posts
    • 929 Thanks
    Freecall
    • #5
    • 14th Mar 17, 5:53 PM
    • #5
    • 14th Mar 17, 5:53 PM
    On this forum and in other places people say 'Timing the Market' is a "bad" thing, but I am not sure why.
    Originally posted by SteveG787
    Put simply, your knowledge of the world's financial forces at any point in time is less good than the collective understanding of all participants in 'the Market'.

    Therefore, on average, you will lose if you try and compete.

    Any one of us will.

    Unless of course you know something that the rest of the world doesn't?
    • EdGasket
    • By EdGasket 14th Mar 17, 5:54 PM
    • 3,456 Posts
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    EdGasket
    • #6
    • 14th Mar 17, 5:54 PM
    • #6
    • 14th Mar 17, 5:54 PM
    Your method would be bad in a market that oscillates up and down 10 to 20% but basically moves sideways; you'd be selling low and buying high all the time. There is no mechanical way of beating the market. There are certain indicators as to whether the market is cheap or expensive; best to use those. But if it looks expensive, be prepared for possibly a long wait until it looks cheap and even then it could be at a higher level than now.
    • dunstonh
    • By dunstonh 14th Mar 17, 6:07 PM
    • 87,699 Posts
    • 52,929 Thanks
    dunstonh
    • #7
    • 14th Mar 17, 6:07 PM
    • #7
    • 14th Mar 17, 6:07 PM
    As a former engineer my method would be a simple mechanical buy and sell process applied to each fund, if it drops from its top price by more than say 10% then sell, when it rises more than a similar amount above it's low price then buy.
    When you have sold, what happens if it continues to rise by another 30% before it drops 10%?

    but I am starting in the position of already being well ahead of the curve (about 40% gain in 3 years).
    That doesnt put you ahead of the curve. Indeed, assuming 100% equities, that puts you behind.

    By exiting the markets, you also lose the income element of the investment.

    You will not have the skill or knowledge to know when top is top or bottom is bottom or then the next drop or growth period is going to be.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • OldMusicGuy
    • By OldMusicGuy 14th Mar 17, 6:22 PM
    • 62 Posts
    • 87 Thanks
    OldMusicGuy
    • #8
    • 14th Mar 17, 6:22 PM
    • #8
    • 14th Mar 17, 6:22 PM
    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.
    • Thrugelmir
    • By Thrugelmir 14th Mar 17, 6:33 PM
    • 53,353 Posts
    • 45,948 Thanks
    Thrugelmir
    • #9
    • 14th Mar 17, 6:33 PM
    • #9
    • 14th Mar 17, 6:33 PM
    but I am starting in the position of already being well ahead of the curve (about 40% gain in 3 years).
    Originally posted by SteveG787
    Do put that down to your own skill and judgement? In investment parlance it's referred to as self-serving attribution bias. Then there's illusion of control when people believe that they believe they have more influence than they actually do over a random or partially random event.
    “ “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton
    • ChesterDog
    • By ChesterDog 14th Mar 17, 6:49 PM
    • 734 Posts
    • 1,254 Thanks
    ChesterDog
    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.
    I am one of the "Dogs of the Index".
    • MPN
    • By MPN 14th Mar 17, 6:56 PM
    • 174 Posts
    • 58 Thanks
    MPN
    After the Brexit vote the markets dipped by about 7% and my wife insisted I move her S&S Isa investments into the Cash Park! I tried to explain that this is probably a nervous jerk reaction and that things would calm down, however she insisted to go ahead and move into cash!

    9 months later and she is still waiting for a time to reinvest whilst my investments have gone great guns! I don't actually know when she will enter the market again but I do know she's lost out big time in the last 9 months by moving into cash!
    • OldMusicGuy
    • By OldMusicGuy 14th Mar 17, 7:28 PM
    • 62 Posts
    • 87 Thanks
    OldMusicGuy
    In investment parlance it's referred to as self-serving attribution bias. Then there's illusion of control when people believe that they believe they have more influence than they actually do over a random or partially random event.
    Originally posted by Thrugelmir
    Good point. I have been congratulating myself that I "timed" the market in 2015 and 2016 because I spent too much time reading MoneyWeek and other harbingers of doom and went fully into cash in early 2015, convinced the "big correction" was looming. I avoided the China drop and the Brexit drop and came back into the market in the second half of 2016, since when my overall gain is about 8%. Good on me I thought when I saw this thread. So I checked what my funds had done in the 2015/16 period and overall if I had stayed invested I would have made a gain!
    • Jon_W
    • By Jon_W 14th Mar 17, 7:43 PM
    • 108 Posts
    • 17 Thanks
    Jon_W
    I guess that if it's one of the things you can do well it's a very good thing indeed!
    • Audaxer
    • By Audaxer 14th Mar 17, 7:52 PM
    • 155 Posts
    • 33 Thanks
    Audaxer
    I don't think timing the market is a 'bad thing', it's just extremely difficult or impossible to get right as others above are saying. However I agree with the post above by OldMusicGuy that you are asking about protecting your gains. I don't see anything wrong about cashing in your profit if you need the funds for something else in your life. That is what investment is for after all.

    If say, all my funds were in equities and I had made a 40% gain, I would be tempted to move it to a less riskier investment where it wasn't all equities. I could make more if I leave it longer, but if it drops 10% or more quickly I might be disappointed that I didn't protect my 40% gain.
    • SteveG787
    • By SteveG787 14th Mar 17, 8:00 PM
    • 36 Posts
    • 4 Thanks
    SteveG787
    Wow.

    That's unanimous then, it's definitely a bad thing.

    Just to clarify, I'm not trying to predict, it's based on what has already happened. Also I'm not trying to beat the market, I know this will cost money in the long run over holding. The advantage to me (that I'm willing to pay for) is rather than go all the way to the bottom and back I kop out on the way down and go back in on the way up.

    Anyway, lots of food for thought, and thanks for all the above. Now I'm going to go and play with the Vanguard graph mentioned above.
    • LHW99
    • By LHW99 14th Mar 17, 8:33 PM
    • 706 Posts
    • 528 Thanks
    LHW99
    If your happen to make a decision based on how you are managing your portfolio eg moving into cash ready to transfer providers in August 1998 just before the Russian financial crisis and buying back just after - you do well and think you've "timed the market".
    If you want to increase your exposure to financial stocks and buy into Lloyds and RBS at the beginning of 2007 and then hold - everything goes **** up and you know timing the market is a rubbish idea!
    • grey gym sock
    • By grey gym sock 14th Mar 17, 8:34 PM
    • 4,040 Posts
    • 3,502 Thanks
    grey gym sock
    I'm not trying to beat the market, I know this will cost money in the long run over holding. The advantage to me (that I'm willing to pay for) is rather than go all the way to the bottom and back I kop out on the way down and go back in on the way up.
    Originally posted by SteveG787
    well, if you want the falls in the value of your investments to be shallower, and are prepared to accept lower returns to achieve that, the more obvious approach is to reduce the percentage you're holding in equities.
    • longleggedhair
    • By longleggedhair 14th Mar 17, 8:49 PM
    • 203 Posts
    • 289 Thanks
    longleggedhair
    I think it's a personal thing, and what you feel most comfortable with. I have been steadily investing since 2009, and have easily doubled my money, it's been a great period to invest.

    I sold 80% of my holdings in February and to lock in those gains I've invested into a with-profits bond (against the advice of many here) which is investment linked and has a minimum guarantee of 103% of my initial investment at the end of the five year term.

    I'm more than happy with the level of gains I have made and now I've locked those gains in with a link to the potential upside in the market. At the end of the period I may drip the money back into the market or I may not. And I'm going to continue drip feeding money into my investment trusts once again.

    I personally feel at the moment there is very little upside in the market currently but plenty of downside, but I could be wrong. It's all about what your circumstances are and what you feel comfortable with.
    • Ray Singh-Blue
    • By Ray Singh-Blue 14th Mar 17, 9:41 PM
    • 300 Posts
    • 381 Thanks
    Ray Singh-Blue
    I don't think trying to time the market is a bad thing. If you get it right, it's a great thing. Trouble is, when you throw the dice, you are as likely to land on a snake as on a ladder.

    I wonder how many people here genuinely do not throw any dice with their investments. Unless an investor is going to stick with a completely passive approach, they are going to have to make some investment calls. These might involve choice of funds, choice of companies, choice of geographies, choice of asset classes, choice of sectors.... or choice of entry and exit points.

    My "discipline" is to throw no more than one dice per month, and in fact this month my choice was to move a chunk of money from VWRL to cash. Only time will tell if that was a good call- every trade has a winner and loser.
    • jimjames
    • By jimjames 14th Mar 17, 9:41 PM
    • 11,783 Posts
    • 10,143 Thanks
    jimjames
    I avoided the China drop and the Brexit drop and came back into the market in the second half of 2016, since when my overall gain is about 8%. Good on me I thought when I saw this thread. So I checked what my funds had done in the 2015/16 period and overall if I had stayed invested I would have made a gain!
    Originally posted by OldMusicGuy
    Why didn't you buy back into the markets in early 2016 when they dropped a lot (25% or so)? By not doing so you missed out and your reasoning might help the OP understand why it doesn't happen like they think.
    I wonder how many people here genuinely do not throw any dice with their investments. Unless an investor is going to stick with a completely passive approach, they are going to have to make some investment calls. These might involve choice of funds, choice of companies, choice of geographies, choice of asset classes, choice of sectors.... or choice of entry and exit points.
    Originally posted by Ray Singh-Blue
    Maybe it's a strange way of me timing but I would say that if there is a big drop I tend to move more into equities to get bargains. I do think that's different to actively selling up, it just means my cash funds get reduced for a period of time because I added more into shares.
    Last edited by jimjames; 14-03-2017 at 9:46 PM.
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