The Impossible Dream? Timing the Market
It is every investor’s dream to time the market, for obvious reasons. A successful market timer does not have to have any skill at picking stocks since market timing alone will deliver extraordinary returns. In fact, we begin this chapter by looking at the immense payoff that can come from timing the market well, and this payoff to timing the market makes all of us easy victims for the next market-timing sales pitch.
The problem with market timing, notwithstanding its potential for delivering huge returns, is that it is so difficult to do, on a consistent basis. We look at a range of market timing strategies, from technical indicators to fundamental indicators to macroeconomic variables, and we note the pitfalls with each one. We also look at the assumptions underlying each indicator and why they sometimes help us predict market movements and more importantly, why they fail so frequently.
MARKET TIMING: PAYOFFS AND COSTS
The question of whether market timing has a big payoff and what its costs are arouses strong views from both practitioners and academics. While academics are fairly unified in their belief that market timing is not worth the time and resources that are expended on it, practitioners feel deeply on both sides of the issue. We begin by looking at the payoffs to market timing and then consider the costs.
The Payoff to Market Timing
In a 1986 article, a group of researchers1 raised the hackles of many an active portfolio ...