The concept of buying low and selling high is well known. Achieving this consistently will inevitably result in profit. The ‘secret’ is knowing when to buy and sell.

An investor may believe that a particular company is likely to do well following an event in the news. The consensus is that the share price will increase and that the investment will perform well if bought at the right time.

Similarly, an investor could be concerned about world events and choose to sell their investments rather than face future losses.

There are many reasons why the idea of timing the market can seem attractive. Investors often like to believe that their own knowledge or judgement will give them an edge over others. It can also give a perception of control over a volatile and unpredictable market.

In this sense, investing is similar to driving on a motorway. You can adjust your speed, weave in and out of traffic and try and take shortcuts. But you will spend a lot of effort (and petrol) for very little reward in terms of the end result.

Why Timing the Market Doesn’t Work

There are many reasons why timing the market is counter-productive:

• It’s impossible to know when the market highs and lows occur. Even after heavy losses, share prices could always fall further.
• The markets are efficient, which means that share prices usually already reflect all information available in the public domain. By the time an individual investor is able to act on the news, so have thousands of others. This eliminates any perceived ‘edge.’
• Financial markets swing on a daily basis. This means that heavy losses are usually followed by a recovery. By trying to reduce losses it is too easy to miss out on growth.
• Market fluctuations are usually influenced more by investor behaviour than tangible facts. This can be unpredictable and not always logical. Following the crowd can lead to ‘bubbles’ whereby shares are artificially overpriced due to increased investor demand.
• While any investor can make a few lucky calls, successfully basing your entire lifetime investment strategy on timing the market requires a level of luck similar to winning the National Lottery.
• Trading frequently is likely to increase costs that will cut into your returns.
• Constantly monitoring and tweaking your investment strategy takes a lot of work. This can lead to decision fatigue, second-guessing your decisions and frustration at missed opportunities.
• The belief that an individual can time the market is heavily linked to investor biases. We have a natural tendency to believe that our judgement is superior and that we have inside knowledge not available to others. But this means assuming that we can make better investment decisions than professional fund managers with cutting-edge research data and billions under management. Not just once or twice, but every time. Does this seem likely?

Over the longer term, the likelihood is that trying to time the market will leave you worse off than letting your investments run their course.