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Market Timing

by Matt Shibata

The below are not popular things to say (especially as financial professionals who are often expected to say something else!), but these are things that we say quite often here at MFA:

  • Nobody knows what financial markets are going to do.
  • Do not try to time getting in or out of the market.

Unfortunately, humans have cognitive biases (which are reinforced by financial news and media) that encourage us to believe that we can predict future market movements. There is overwhelming evidence that market predictions are difficult at best and impossible at worst. Successful investors understand that predicting market movements is not as important as financial management, risk management, asset allocation, probabilistic decision-making, and so on. Although there are many pundits and talking heads constantly opining on future market direction, many of the world's top investors (who actually manage real money) believe market timing is a fool's errand.

First of all … an investor must understand that they probably will not be able to play the game well. They probably will not be able to decide how to move in and out of things. In order to be successful in the markets, it is more difficult than getting a gold medal in the Olympics. You wouldn’t think about competing in the Olympics, but everybody thinks they can compete in the markets. But there’s more money competing. It’s like a zero-sum game and there’s more money doing it, and the worst thing you could do is think you can time all of these movements. I guarantee you, the game is a tough game. We put hundreds of millions of dollars into the game every year. And it’s tough. So what the individual investor needs to do is know how to diversify well. So the word that I would — Know how to diversify well and in a balanced way. ”

-Ray Dalio, TED Connects, 2020

I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”

-Warren Buffet, Fortune, 2001

…if I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.”

-Benjamin Graham, interview, 1976

Market timing, defined as a short-term bet against long-term policy targets, requires being right in the short run about factors that are impossible to predict in the short run.”

-David Swensen, Pioneering Portfolio Management, 2000