Of all the schemes investors have come up with to try to avoid losses and/or to beat the market, market timing is probably one of the most seductive. It seems obvious that when something significant occurs in the U.S. economy or elsewhere in the world, you’d expect the market to react accordingly. Wouldn’t that be a good time to buy or sell depending on the nature of the event?

There are two reasons why market timing cannot work. The first is that the market is comprised of millions of investors, many of whom do not think the same way that you do. Why do I assert that? Because every trade involves two people with opposing viewpoints. The seller believes there are better uses for the cash acquired from selling the security, perhaps for investing it in something else or simply to use it for living expenses. The buyer believes the opposite: putting their cash in that security is better than investing it elsewhere or using it for other purposes.

Buyers and sellers do agree on one thing: the price of the security in the trade. But other than that they have totally different expectations. And it must be so. Because if every owner of a particular security believed that their best option was to hold onto it, there would be no trades. Unless some buyer was willing to acquire that security at any price, no matter how stratospheric.

The millions of investors trading thousands of securities daily is what drives overall market movements. And it’s why the stock market will not necessarily behave in ways that you believe it should. Why would you think that you can predict how that balance will tilt on any day given such a diversity of opinion, much of which is different from yours?

But that’s only one reason why market timing is so challenging. There are four things that you have to be able to do in order to correctly time a market peak and trough:

• First you have to be able to identify the peak in advance. This has been the holy grail of technical analysis for many decades. To date no one has figured out which indicators can reliably provide the answer.
• Next you have to be able to act (that is, sell your holdings) before everyone else does. The days (and often minutes) around market peaks & troughs are among the most volatile. If you sell too soon you miss the run-up before the peak. And if you wait too long you miss the plunge afterwards. How easy do you think it would be to get that timing exactly right?
• Yet you’re only halfway done. You’ve sold all your stocks or bonds or funds. Unless you’re planning to spend the rest of your life keeping all your savings in cash, you’ll need to figure out the exact time to buy back in. That’s the same two challenges as above but for buying rather than selling. Good luck.

Most timers don’t even attempt to do it precisely. They sell when they think the market is expensive or when bad news pops up in the media. They buy after stocks or bonds have made reassuring gains well after a bottom. But there’s a cost to that approach. Morningstar estimates that investors lose as much as 15% of returns by buying and selling stock and bond funds at the wrong times (see https://www.morningstar.com/lp/mind-the-gap ).

What’s the solution? Follow a saving and investment strategy designed to provide the money you need for the things you want throughout your life instead of trying to time the markets. You are likely to do better in the long run.