Last time I checked, they said it is going to rain heavily. But I was actually simply carrying an umbrella as useless luggage the entire day. I am sure most of us would have been fooled by the weather forecast one way or another. But do you who got tricked more than us? They are the investors who tried to time the markets.
Now you might be thinking, "what's so bad about it?" So why waste time. Let's quickly jump into the details of it. A few solid reasons as to how you are losing if you are timing the market and why you should quit timing the market are as follows.
Predicting the Market Timings is Bad Practice
Predicting the market is far more difficult than forecasting weather. But most of the time we forget this fact and are carried by our emotions. We tend to be the most brilliant of the lot. But, unfortunately, we end up doing something that is exactly the opposite. Even the greatest investors who have mastered A-Z of investing quit performing such things. Investors like Warren Buffet and other professionals believe that it is one of the most foolish acts an investor can perform. This is simply because there is a 100 percent chance that your predictions are going to go wrong. Say you are predicting that the price of a stock is going to increase by 5%. But overnight, there was an issue, and the markets crash instead of rising, making your predictions wrong ultimately.
As the smallest of smallest things influence the market, you cannot predict the right time as to when the price would rise or fall.
1. You are losing a lot than you think
Every time you wait for the best opportunity to come or knock on your door, you fail to see one thing. The one that is already in your hand. Say you want to buy the stock of XYZ. You are looking forward to a correction in order to invest. But unfortunately, there wasn't one for the successive five years. But the price rose to 150 at the end of 5 years from 50. To add on, an earlier investment would have made you eligible for the dividend payouts as well. In the end, you lost the chance to make a profit and an opportunity to increase your income yield.
It is extremely difficult to calculate market highs or falls. No amount of math can help you with this. Even if you were lucky the first time, it might not occur twice. Further, you might be making a number of wrong decisions and will end up in a rampage of buying and selling. This ultimately makes your broker the winner and not you.
2. Gives place to emotions
Emotions are what make us human. But it is something which, as an investor, you must keep away from. Or otherwise, you will be witnessing a lot of trouble. It will drive you to make decisions which you will most probably regret about. If you are looking for a hike in price in order to sell your stocks and say the market crash, you might easily give place to fear. This may cause you to sell off immediately or at the wrong time, causing you to grieve over permanent losses. Your constant efforts to time the market will make you weak emotionally. Consequently, you will end up speculating rather than investing.
3. You can never eliminate this from the market
Humans are the most difficult subjects for any expert. And no amount of Ph.D. or M.phils will help you anticipate the way they behave. Even experts and professionals find it difficult to interpret their mindsets in different situations. Though numbers that rule the market, you can never eliminate the human element that co-exists with it. The market always reacts differently to different situations.
Say, for example, a company is incurring huge losses. As a rational investor, you would expect the prices of its shares to fall. But there is a high chance that the price may increase. It might be because of the optimistic view of the company's shares, trust upon the board of directors, illegal trading, etc. Likewise, vice versa is also possible. Pulling a correct prediction about the market is something impossible unless you crack this subject. And that is no-where near to a possibility.
I hope all this would have made you fear the act of timing the market. Above all, why even try something that will cause you a loss and offers no scope for success?
What you should do instead
As an investor, you should always keep your head off the concept of “timing the market”. This can help you in staying away from dreadful bumps. Further, if you look at the long term returns small variations in price will not make a huge difference. Hence, giving no reason to time the market. So stick onto your analysis and invest systematically.