Why Market Timing is Hard

Not long after you convince yourself that buy-and-hold is the best way to invest in the stock market, you start to get doubts.  Sure, owning a well diversified portfolio of stocks through thick and thin is the best way to capture the high long-term average returns that you expect, but couldn’t you do a little better?  Couldn’t you sell your stocks when the market is particularly high and maybe double down when it is particularly cheap?  How hard could that be?

image Pretty darn hard, it turns out.  Only in the clarity of hindsight are those market peaks and bottoms obvious.  The towering heights that the market reached in the spring of 2000 and fall of 2007 now look like great places to exit only because we know what happened next.  Yes, stocks in 2000 were by many measures more expensive than they had ever been in the past, but saying that everybody should have therefore known to sell is unfair, because stocks had been unprecedentedly expensive in each of the four or five years prior to 2000 as well.

Spotting the low points when they happen is no easier.  After its disastrous September, the market was by many objective measures very cheap in the fourth quarter of last year.  And then it went down a lot more.

But even if you did have a useful objective measure that would tell you when the market was too expensive or cheap, actually using it would be a lot harder than it sounds in the abstract.  See that dip on the chart above in early March?  That’s when the market hit its low for the year so far.  It is also when I published this post, making the strong case that the market was then really cheap.  Since that day the S&P is up about 25%.

Did I act on my judgment that the market was a bargain, invest big and reap a much needed profit?  Are you kidding?  Read the post again.  I had thought it was too cheap months before, only to watch it get more cheap every week. I didn’t understand why it had gotten so low, and so had no reason to believe it wouldn’t go lower.

When I was just starting out in the professional investing world, one of the senior guys in the office took me aside and said something like “Frank, what you gotta understand about the market is that it’s really all psychology.”  This guy made roughly a hundred times as much money as I did, so I nodded and smiled, all the while thinking to myself something like “what a pompous and empty platitude.”  It only took me about ten years to understand the wisdom he was trying to pass on to me.  It’s not just that stock  prices move up and down because of the irrational behavior of other investors.  It’s that making money in the market is hard because of your own irrational behavior.

It has been said that the four most dangerous words in investing are “this time is different.”  When the market is very cheap it is nearly impossible to convince yourself that it is a good time to buy, even if in hindsight every other time it was that cheap it had been a great time to buy.  Because when push comes to shove you are sure that this time is different.  You worry that this time the world really is coming to an end, that capitalism is dead, and that your kids better start studying Chinese if they ever want to get a job.  Then the market goes up, the dust settles, and you feel like an idiot.

That it is very difficult to buy at the bottom and sell at the top is not mere coincidence.  You are just like everybody else, irrationally scared at the lows and foolishly confident at the highs.  Widespread fear and confidence is why the market was low and high to begin with.

Which is why you should cast away your doubts about buy-and-hold.


  • By Rob Bennett, April 7, 2009 @ 7:38 am


    You are addressing here the most important issue in personal finance today. It is confusion re the question of whether timing works that is the primary cause of today’s economic crisis. I have spent seven years studying this topic in great depth. I am 99 percent certain that you are wrong in what you are saying here.

    To be sure, you are right about a good deal of what you say. Stock prices ARE set by emotion in the short term. So anyone who thinks he knows where stock prices are going to be a year from now or two years from now is kidding himself. I have seen no evidence in my research that short-term timing works.

    But stock prices are NOT set by emotion in the long term. In the long term, it is the economic realities that set stock prices. Stock prices are highly predictable 10 years out. They are very highly predictable at 15 years out and 20 years out. Those who invest heavily in stocks at times when they are insanely overpriced always suffer huge long-term losses as a consequence. There is not one exception in the historical record.

    What I am saying can be proven with numbers. There is a calculator at my web site (“The Stock-Return Predictor”) that employs a regression analysis to reveal to investors the most likely 10-year return on an investment in a broad stock index. At the price levels that applied in the early 1980s, the most likely annualized real return for the following 10 years was 17 percent. At the price levels that applied in January 2000, the most likely annualized real return for the following 10 years was a negative 1 percent.

    It does not make sense to go with the same stock allocation when stocks are paying a negative 1 percent as you go with when stocks are paying a positive 17 percent. Timing works. Short-term timing never works, for just the reasons you describe. Long-term timing ALWAYS works. Because the economic realities always prevail over investor emotions in the long term.

    I hope you will spend some time looking into this. You can help a lot of people understand why we are today in the greatest economic crisis since the Great Depression by doing so.

    Market timing is not hard. Market timing is easy. But you need to be engaged in the form of market timing that makes sense for it to work.


  • By ObliviousInvestor, April 7, 2009 @ 9:22 am

    Oooh, now there’s an interesting comment.

    Also, I love how experts declare that “buy and hold is dead” every single time the market has crashes.

  • By GPR, April 7, 2009 @ 11:22 am

    Can you imagine Warren Buffett taking the time to post such a long winded comment on a small web site?

  • By Jason, April 7, 2009 @ 1:46 pm

    “It’s that making money in the market is hard because of your own irrational behavior.”

    This is so key. I’ve been very tempted to sell, sell, sell despite knowing that this is the worst possible time to get out of the stock market.

    I’ve also really been tempted to put all new retirement contributions into bonds, despite knowing this is the best time to buy low.

    I’m sticking with buy and hold, but I can’t say that I’ve been immune to feeling like I’m throwing good money after bad. Of course, that’s not irrational so much as taking the short view over the long view.

  • By Mark Wolfinger, April 7, 2009 @ 2:13 pm

    Rather than discussing the merits of buy and hold, those who offer such advice should concentrate on educating investors on how to protect the value of their holdings. At least that makes buy and hold viable.

    Collars and other conservative option strategies eliminate large losses – and that’s what it takes for long-term success in the markets.


  • By Mr. ToughMoneyLove, April 8, 2009 @ 8:14 am

    “Frank, what you gotta understand about the market is that it’s really all psychology.” This is an simple yet profound statement. Throw all that stuff you learned in business school out the window. Learn what irrational people do in response to what they hear and read and you are as educated as you can be in the world of equity investing.

  • By Rick Francis, April 8, 2009 @ 6:31 pm

    Rob Bennett Wrote:
    >Those who invest heavily in stocks at times >when they are insanely overpriced always >suffer huge long-term losses as a >consequence. There is not one exception in >the historical record.

    This statement is offered without references so I was a bit skeptical… I did some searching and found a reference that refutes that statement:

    Assuming that their table is correct the worst nominal percentages for investing 5 or more years is -4.3%. The worst nominal percentage for 10 or more years is -3,2% and the worst nominal percentage for 20 or more years is +2.5%.

    That’s hardly huge losses- and it looks like most of the lows occurred when selling at a market low rather than buying at a market high.

    Their conclusion was:
    >Somewhere between an investment holding >period of 20 and 21 years, the worst case >inflation-adjusted S&P 500 rates of return >turn positive. For an investment in the S&P >500 held for at least 35 years, the worst >ever recorded rate of return is a positive >3.2%. And by 47 years, the annualized real >rates of return recorded are no less than >4.2%!

    Did you calculations include reinvesting dividends? If you are going to make such a bold statement you should back it up with data and details of how you calculated it.

    -Rick Francis

  • By Rob Bennett, April 8, 2009 @ 7:24 pm

    This statement is offered without references so I was a bit skeptical… I did some searching and found a reference that refutes that statement:

    You’re smart to be skeptical, Rick. People play all kinds of games when reporting numbers in the investing area. Just about any number can be reported six different ways. So you definitely are right to be careful when hearing investing numbers cited.

    The claim that I am making about huge losses comes from the introduction to Robert Shiller’s book “Irrational Exuberance.” I’ve checked it myself though by looking at the historical data.

    We have been at a P/E10 level of 25 four times in U.S. history. On these four occasions the average price drop is 68 percent. That’s what I mean by a “huge loss.” Whenever we go to those price levels (we went to 44 in January 2000), we are certain to have a huge price crash coming up ahead.

    The number is intentionally stated in dramatic form. The 68 percent drop is not a loss suffered for any particular length of time. It is the greatest loss we saw during the time-period following the high price level. So the loss of that size might have remained in place only a short time. It does not include dividends (but that would not necessarily matter much if we are only talking about a short period of time in which a loss of that size was in effect).

    You are citing other statistics showing that over longer periods of time stocks offer better performance. That is so. The one statistic does not cancel out the other. The two statistics point to different realities. Reality # 1 is that stocks generally offer a strong value proposition — losses do not remain in place forever. Reality #2 is that valuations have a huge effect on long-term returns. So to assess the value proposition that applies at any particular point in time you need to take valuations into account.

    The strategic question is — Should you be heavily invested in stocks at the time when a 68 percent price drop is likely coming up ahead? I say “no.” You are saying that “the worst nominal percentage for 20 years is 2.5 percent.” That’s a horrible 20-year return for stocks. If you check the data, I am certain that you will find that valuations were high at the beginning of that 20-year period. You could have timed the market and thereby avoided having your lifetime return greatly reduced by being heavily in stocks during a time when they were paying such a low return.

    You obviously would not need to be out of stocks for that entire 20-year time-period to bring your personal return far above the 2.5 percent number. Stocks did not perform poorly for that entire 20-year time-period. What happened is that they performed VERY poorly for a brief time-period (when the loss was probably something in the neighborhood of 68 percent). Then they performed just fine for a long time period. Had you missed out on the 68 percent drop, YOUR return at the end of the 20 years might have been 6 percent real or higher.

    The key is knowing when the 68 percent drops are coming. The answer is — they always come when we go to a P/E10 level above 25. We are four for four; there is not one exception in the historical record. There has never been a huge price crash that remained in place for a significant amount of time when we were not at extremely high prices. Those are impending crash prices.

    The rub is that we cannot say how long it will take before we see the big crash. We went to 25 in 1995 and stocks didn’t begin performing poorly until 2000. Those who lowered their stock allocations in expectation of a crash as soon as we went to 25 missed out on five years of good stock returns. In the long term, though, those who “miss out” on a few years of gains because they want to avoid a huge crash end up ahead. There is a cost to engaging in long-term timing, but there is also a cost of not doing so. The cost of not engaging in long-term timing is greater than the cost of engaging in long-term timing.

    That’s true only in the long term. It’s not true in the short-term. I do not believe that short-term timing works. The saying should be: “short-term timing never works, long-term timing always works.” That’s what the historical data really shows.


  • By JakeBrakeman, April 21, 2009 @ 9:28 am


    Trying to engage Mr. Bennett on his lack of facts, and ridiculously poor advice is laudable. Unfortunately, as many have discovered, the facts don’t slow him down for a moment.

    The link below shows how he handles the facts in another thread he has going right now. Typically, once the facts show up, he runs for the hills, into another long winded post on a slightly different topic.

    The site that this thread occurs on is his favorite haunt, as he has the most posts of any contributor under screen name Hocus, so poke around and find some of his other threads there, too. At first, you will likely be entertained, but ultimately, you will likely be saddened by his obvious issues.


  • By JakeBrakeman, April 21, 2009 @ 10:28 am

    An interesting clip — Kramer sounds like Hocus er ah Bennett…. when he blows up yelling about Bogle and indexes…

  • By Rob Bennett, April 21, 2009 @ 11:57 am

    I think it would be fair to say at this point that investing is something less than a 100 percent rational endeavor.


  • By Silicon Prairie, April 21, 2009 @ 1:13 pm

    The point that price levels were already too high in 1995 is interesting – it’s true that by reducing your allocation because it didn’t look like a good investment then you would have missed out on more gains (depending on how much you took out). But isn’t that what all speculators say? Trying to stay in the market because you think it might go up for all the wrong reasons isn’t a good principle for the average investor – it’s the most difficult form of market timing.

    That leads to another problem with this; if you buy and hold at all costs, then the gains from 1995-2000 will be mostly erased by the subsequent loss. You might keep a small profit from rebalancing to your target asset allocation along the way (possibly missing more gains?) but that’s it – the rest goes as easily as it came.

    In general I’m all for the spirit of buy and hold, but if you have a general understanding of how the market works it seems wise to account for the fact that sometimes a fool will offer to buy your investment for far more than it’s worth. Why not take that deal?

  • By Evidence Based Investing, April 21, 2009 @ 1:18 pm

    Rob Bennett said “Stock prices are highly predictable 10 years out.”

    I went to the ”The Stock-Return Predictor” at your website. It gives a range of 11.61% to -0.39% for ten years.

    That is not what I would describe as “highly predictable”

  • By Rob Bennett, April 21, 2009 @ 2:07 pm

    I went to the ”The Stock-Return Predictor” at your website. It gives a range of 11.61% to -0.39% for ten years. That is not what I would describe as “highly predictable”

    Precise predictions of stock returns are not possible, Evidence. The range of possibilities is broad. That’s a totally fair statement and an important one.

    The question is — Is there value in knowing that the range of possibilities is dramatically different at one valuation level from what it is at another valuation level? The answer is — Yes! There is great value in knowing that. Knowing the difference in the ranges tells you that the risk of owning stocks is far greater at some valuation levels than it is at other valuation levels. Check out the ranges of possibilities that apply at other valuation levels and you will see what I mean.

    When I say that returns are “highly predictable” at 10 years, I do not mean to say that the predictions are highly precise. They are not. I mean to say that the statistical tests that are commonly used to determine whether something is highly predictable or not show that we can place a good bit of confidence in our findings re the differences in the ranges of possibilities.

    Even the precision is better than what is suggested just by considering the entire range of possibilities. The returns you are citing are the ones that have even a minimal chance of coming up. You can narrow the range by looking only for returns that have at least a 60 percent chance of coming up or something like that. That gives a greatly reduced range.

    It is certainly the case that we cannot know all that we would like to know. Again, that’s an entirely fair comment. However, It is not even a tiny bit the case that we can know so little that we have no choice but to invest passively. Nothing could be further from the truth. We can easily know enough to know that we must make changes in our stock allocations when prices go to insanely dangerous levels. We don’t know it all today, but we know a whole big bunch more than we knew in the days when people first began promoting the idea that it is a good idea to invest passively.


  • By Rob Bennett, April 21, 2009 @ 2:17 pm

    I’m all for the spirit of buy and hold, but…

    You and me are soul brothers re this one, Silicon.

    I love the spirit conveyed by the phrase “buy and hold.” The spirit is one of sticking to a plan, not flitting from one strategy to another, tuning out the media noise, things like that. All of that is wonderful. My personal belief is that it is the spirit that many pick up on when they hear the phrase “buy and hold” that is primarily responsible for the huge popularity of the Passive Investing concept.

    My take is that the flaw is that we have come to believe that sticking to a plan means sticking to one stock allocation. No! It’s just the opposite!

    The risk of owning stocks changes with changes in valuation levels. If you stick with the same stock allocation when prices change dramatically, you are permitting your risk level to change dramatically. That’s sticking with a plan? Huh?

    The proper way to stick with a plan is to keep your risk level roughly constant. That means changing your stock allocation in response to big price changes.

    I don’t just say that timing is possible. I say that long-term timing is REQUIRED for the investor seeking to stick with a plan for the long term.. It is engaging in long-term timing that is consistent with the spirit of buy and hold. Sticking with the same allocation after prices change dramatically is NOT consistent with the spirit of buy and hold.

    What we really need is a new understanding of what is signified by the phrase “buy and hold.” The goal should be to keep one’s risk level roughly constant.


  • By critter, April 21, 2009 @ 8:10 pm

    Please go to Rob’s website and read and listen. It’s definitely an education into his investment ideas.


  • By Rob Bennett, April 22, 2009 @ 6:43 am

    Thanks, critter.

    I think.


  • By Dave, February 13, 2010 @ 10:18 pm

    “That it is very difficult to buy at the bottom and sell at the top is not mere coincidence.” – This is so true! No one I know who trades profitably gets the tops or bottoms. Which begs the question: Why not wait for a trend to emerge, and buy the middle instead?

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