The old saying, “Timing is everything,” certainly has applicability to market investing. For equities, “perfect timing” means going to cash right before a market downturn, holding the cash until the downturn hits bottom, then buying up all those cheap stocks right before the market heads back up. As the stocks regain their value, they might eventually double, triple, even quadruple the worth of the original portfolio. But here is the caveat:
Anyone who tells you that they can actually “time the market” this way may also want to give you “the inside scoop” on a bridge for sale in Brooklyn.
That is not to say one should ignore timing investments altogether. There are algorithms and other “mechanical” means to create a “timed” investment method. However, this method relies on data trends that indicate pending market drops or upticks that are apparently triggered when you take money out or put it in. Rigid discipline is required not to let your “gut instincts” override the system. In my experience this form of “timing” works maybe half the time, or less.
Of course, being human, many investors cannot help being drawn to the seeming prescience of those famous advisors who magically seem to “know” when to buy and when to sell and, as a result, make millions. Less famous advisors will point to a time when they pulled out or jumped into the market at exactly the right moment and saved or made clients fortunes. If they offer this boast, you might ask if they ever repeated their good fortune. Without disparaging those with good gut instincts, we feel there are two investment considerations at least as important as timing:
1. What you buy
2. Strategies that rely less on timing the market than successfully weathering market volatility
In a recent TED talk, early-stage venture capital investor Bill Gross presented research he had done on start-up companies, something he knows more than a little bit about. He found there were five factors that determined a new company’s survival: the idea, the founders/management team, the business plan, funding and timing. Now, Gross did find that timing was the number-one factor in start-up survival and success by far, even though the other factors were important, too.
Here is the point: When you invest in a stock, you invest in a company. Using these five criteria to evaluate a company can help you determine if it is a good investment. That includes timing. An idea ahead of its time, or behind it, is not a good choice. But a solid idea, well-timed and appropriately funded, with a realistic business plan and strong management should be a good investment. The key: Do the homework before you make the buy. but also have a strategy to handle the risk of timing.
In terms of an investment “method,” again, I think it is less about timing the market and more about strategies that are timeless. Here are three:
1. Diversification of your portfolio—investing in lots of “ideas” and asset classes—increases your odds of having the right investment at the right time.
2. Dollar-cost averaging—meaning you consistently and frequently make same-size multiple investments, the way your 401K does. You do have losses, but usually profit during bull markets.
3. Buy and hold—which still works, as any investor who did not panic and sell off in 2008 can attest. Most of their stocks are worth more than ever.
In sum, the allure of market gurus, famous and not so, who claim the power to time the markets will continue to draw investors to the flame of “hitting it big.” The problem is that for investors, like the moth, things can often turn out badly.