Should I try to time the market? Tops, bottoms, and trends

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Is it time for a trend?

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Prevailing wisdom seems set against those attempting to clock a profit by timing the stock market. That’s why the saying, “Time in the market is better than timing the market,” has become something of a cliché.

Yet despite this wisdom, active traders and investors tend to outnumber the passive “buy-and-hold” crowd (depending on which study you read, you’ll find the share of passive investors numbers between 15% and 37%). This tells us that market timing is still, and probably always will be, a relevant and timely topic.

Perhaps you’re looking to time the market yourself. If so, consider: Is market timing worth the time, effort, and risk?

Market timing is the practice of anticipating market lows and market highs to buy and sell (or sell short) stocks, exchange-traded funds (ETFs), or other assets at the most favorable prices. Simply put, it’s about trying to pinpoint price tops and bottoms to optimize your market entries and exits.

Such timing is what most active fund managers (of mutual funds or hedge funds, for example) try to do. Still, nearly all professional investors find it extremely difficult to pull off. When it comes to market timing, conventional wisdom is that retail investors (like us) come in second place regarding portfolio performance—behind the analysts and Wall Street pros. (Last place, according to the pundits, belongs to economists.)

On the upside, you don’t have to learn a lot of fancy formulas or earn a PhD in order to poorly time your entry and exit points.

According to a Danish legend (also attributed to baseball legend/philosopher Yogi Berra), “Prediction is difficult, especially when dealing with the future.”

In a market context, you can anticipate many potential outcomes, but it’s nearly impossible to predict the single most correct outcome. And therein lies the rub.

Although there’s no uber-comprehensive study on all market timers, smaller studies conducted by financial institutions have shown that most retail investors who attempt to call the beginnings of bull markets and the end of bear markets fare quite badly.

A study from J.P. Morgan Asset Management (see figure 1 below) showed that investors who stayed in the S&P 500 between 2004 and 2023 would have gained 9.7% in their portfolios. But for those who were out of the market during the 10 best days within that period, their portfolio gains would have been reduced to 5.5%. Think about it: Missing just 10 days of the best gains slashed over 40% of the profits made over that two-decade period.

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Timing is everything, especially when it comes to investing.

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There are many different strategic approaches you can use. Here are a few general categories to consider. Just remember that each category has multiple strategies within it, so you’ll need to do some homework.

But first, a big caveat. For some of these approaches, you’ll need to have a good grasp of technical analysis in addition to fundamental analysis. So, if all you’ve done is analyze company financials and economic reports, you’ll have to learn how to read the charts as well.

Trend following. Trend following is a technical trading strategy that involves buying an asset when it’s in a long-term uptrend and selling it (or selling it short) when it’s in a long-term downtrend. The goal is to profit from the continuation of a trend. The problem is that, according to some studies, assets trend only 35% of the time. If you’re caught in a non-trending market, you can lose money fast, buying and selling only to see your assets reverse course.

Contrarian investing. If you have enough nerve to snatch up stocks that investors are ditching en masse and sell stocks that the masses are scrambling to own, then you’re a contrarian. Going against the crowd can be profitable, but you’ll need to develop expert analytical and money management skills to pull it off effectively. Successful contrarians are also able to avoid trading on emotions.

Cyclical investing. Investing in cycles can take many forms. You might rebalance your portfolio to anticipate stages of the economic cycle, switch between value and cyclical (or defensive and growth) stocks, or follow seasonal wisdom like “sell in May” or the Santa Claus rally. The caveat here is that although cycles are predictable (as in, yes, they do exist), their timing is not.

There are more ways to try to time the market, but these are among the biggies. They all have their pros and cons.

The biggest advantage of getting into the market right before a major price move is capturing the largest profit from that swing—the proverbial “buy low, sell high.” If you’re skilled enough in timing rotations in sectors or stock types, you can catch more upside than downside. Plus, you can have greater control over the direction of your portfolio. These are important advantages, but sometimes, they depend as much on luck as on skill. The markets can be irrational and random.

On the downside, you run the risk of missing opportunities. Remember: Missing only a small percentage of those big rally days can cut significantly into your portfolio’s performance. And because the future is unpredictable, it’s extremely hard to call market tops and bottoms.

What often happens is that investors pile into a bull market when it’s well underway, or near the top, and exit bear markets after prices have plunged to that “I-can’t-take-any-more-pain” point. In other words, they buy high and sell low—the exact opposite of what investing is all about.

If you’re a long-term investor, making small but regular contributions to your portfolio (aka dollar cost averaging) can help you accumulate wealth over time, regardless of whether the market is in bull or bear mode.

But to do this right, you’ll need to be well-diversified, preferably in multiple stocks across all 11 sectors of the economy. Depending on how many stocks you want to own, this strategy can get quite expensive. But if you invest in a diversified ETF, like one that tracks the S&P 500, it’s a lot easier to do and much more affordable.

Market timing is a double-edged sword. Although it can help you capture outsize profits, it’s also notoriously difficult. Even the pros can get bruised and battered when their timing is off sync. And for a retail investor, the more you buy and sell, the more you may be racking up in commissions and other transaction costs.

Many investors who buy and hold for the long term tend to perform well, or as well as the broader market. So, whether it’s timing or time in the market, it’s ultimately up to you, your risk appetite, and your level of commitment—both to learning the skills of a good market timer and the time spent watching your trading positions.

And one final note: You don’t need to commit your entire portfolio to one strategy. Want to try to time the market? Start with a small percentage of your portfolio—say, 10% or less—and keep the rest in passive investment vehicles such as stocks, bonds, index funds, and target-date funds. Study the tools and indicators technical analysts use. Learn how veteran traders use futures and options to protect or “hedge” their core portfolios.