Wednesday, June 12, 2013

Two Issues with Trying to Time the Market

"They don't ring a bell at the top (or bottom)." ~ stock market adage

Market timing can theoretically lead to big profits, if one can be in during the major market advances and out during the major market declines.  The two major challenges are:

  • Buying.  Going from all cash to fully invested is hard decision to execute. If the market is declining, a concern is that the market will continue to decline.  If the market has rebounded and is advancing, a concern is getting back in at too high a price.  Both concerns can keep a market timer from being in stocks during the market advances.
  • Selling.  Going from being fully invested to all cash is another hard decision to execute.   If the market is rising, a concern is the market will continue to advance.  If the market has peaked and is declining, a concern is getting out at too low a price.   Both concerns can keep a market timer from selling before the market declines significantly.
  • For example, I converted my 529 college savings plan to cash in mid 2011, while my spouse kept hers invested.  By late 2011, my spouses account had declined 15%.   In 2012, I did not reinvest my funds and therefore missed out on the rally from mid 2012.  Now, my spouse's account is 19% greater than mine.  I'm still waiting for a market correction before reinvesting the cash, and I've missed out on a significant market advance.

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2013 Achievement Catalyst, LLC

    No comments: