What Happens When You Try to Time the Market?


6 ratings



James D. Di Virgilio

13 Jan, 2017

in Psychology

Many investors, professional and otherwise, believe that market moves can be predicted and that making frequent moves in and out of markets and investments will lead to greater returns. However, the data tells a different story, which is that market timing and frequent trading are harmful to your portfolio and will significantly reduce your overall return. Let’s begin by examining market timing.

The data below comes from research done by Terrance Odean, Ph.D., of Cal Berkeley, entitled, “Do Investors Trade Too Much?” Dr Odean discovered that amateur investors performed poorly after they made a trade (Either a buy or a sell, both speculative and non-speculative.) Thus, the stocks they sold did much better than the stocks they bought.


When isolating for just the speculative trades, the returns are even worse.


But maybe this underperformance only affects individual stock investors. Let’s take a look at research from Stanford’s Jason Hsu, Ph.D., on how the mutual fund investors fared. As you can see below, the returns of investors who purchased a mutual fund and held it are much better than those who bought and sold, and this holds true for every single category.


Taking things a step further, Dr. Hsu actually quantifies just how much trying to time the market is costing investors. On average, mutual fund investors are destroying 2% of their returns each year by trying to move in and out of funds and mutual fund categories.


But it doesn’t stop there. What if we want to destroy even more value? All we have to do is trade more frequently. There is a direct correlation between number of trades placed and performance. The more you trade, the more likely it is that you will perform poorly.


Tying everything together, a Dalbar study shows that the average return for an investor is significantly lower than the return of an index. In the study, one that has been replicated many times, investors who were primarily investing in the S&P 500 index, or stocks that made it up, underperformed it by an extremely wide margin. This kind of study can be replicated with any index, in any asset class.


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Anyone that enters the markets becomes a trader.

the question is how long you want to hold?

5mins. 5 months. 5 years.

Feb 01, 2017

Member (3791 posts)

A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. Thatís the kind of thing winning traders do.

--Ed Seykota

Feb 01, 2017

Member (6195 posts)

This state of affairs has nothing to do with how much money I make or even whether I trade at all. If you choose not to assume the responsibility for your situation, then you ought to quit. If you choose not to quit, that is also a choice.

Individual choices are influenced by group ideas and attitudes or memes. I'm pretty sure you spread a meme on numerous trading forums that price behavior has not changed with the advent of HFT and algorithm trading from the 1900s or earlier due to human psychology and that the markets can be consistently exploited based on technical analysis and price's footprint caused by human psychology. Both of these claims are outrageous claims to make without evidence.

Why would you sell a book to traders if you were unable to consistently profit from the market? I can't imagine why anyone would do that unless they have a sadistic and deceptive side to you that is not revealed in common discussions of politics over tea. Mr Charts is free to step in here and answer my questions as well, since earlier in the thread he did make a claim that he reaps huge profits from the market, while apparently he teaches for a living as well.

Feb 01, 2017

Member (352 posts)