The thinking behind timing the stock market goes something like this: “Oooh! I want to buy that stock. But the price is too high right now. Maybe I’ll wait until the price goes down.”
And then when the price does go down, the thinking changes to: “Ouch! I want to buy that stock. But the price is low and what happens if I buy it and it goes lower?”
This is true for real estate, too. A potential homebuyer might say: “Whoa! Houses are too expensive right now. I’m going to wait until home prices come down a bit before I buy.”
But when the sellers market becomes a buyers market, the potential homebuyer now says: “Yikes! House prices seem to be declining. What if I buy and the house declines even further in value?”
I hear this line of thinking OVER AND OVER AND OVER AND OVER. I heard it when I was a stockbroker and I hear it today in my work with financial and real estate professionals. I’ve tried to talk people out of this thinking but it can’t be done. (And the truth is, sometimes I fall into the trap, too!)
Like some optical illusion, the price of a stock or a property is never perfect right now and investors believe that by waiting, they can buy it at a “better” time.
Unfortunately, there never is a better time. EVERY price point has its advantages and disadvantages. Unfortunately, investors only see the disadvantages to buying now (regardless of price point) and the advantages of buying later (regardless of price point)… and they don’t seem to remember what they said only a few months ago when the price was different.
And waiting for a market bottom or market top is impossible because it takes months of data from indicators (including lagging indicators which come after the event) to prove a market peak or valley.
Timing the market is a fools game because investors and homebuyers are always looking for the perfect price point (even though they often can’t identify what that price point is and, even when they do, they fail to act when the price reaches that point).
Timing the market is ridiculous idea and a fools game… but it’s not impossible. You just have to rethink what you mean when you want to time the market.
Joe Average and Jane Average (Mr. and Ms. Average to you) try to time the market but they fail. There are people who CAN effectively time the market. I’m talking about short term traders. Short term traders (day traders and swing traders in the stock market, and real estate investors such as flippers in the real estate market) can time the market and many of them do pretty well at it.
Here’s why some people can time the market but most people fail at it:
- Information volume and prioritization: Successful market timers do it effectively because they receive a barrage of information and they filter out what they don’t need. Compare this to Mr. and Ms. Average who glean tidbits from headlines or from the half-wits around the watercooler at break time and act on each piece of limited info that they get, as if the latest piece of information is the most correct.
- Entries AND exits: Successful market timers consider both entry and exit positions before they buy. To a successful market timer, an “expensive” stock is still cheap if the price goes up and a “cheap” stock is still expensive if the price ends up going down. The same goes for those in real estate. It doesn’t really matter what the entry point is… it’s how much you can sell it for afterward when you are ready to sell. Compare this to Mr. and Ms. Average who likely intend to hold their stocks for decades and who will have to live in their house. They are making entry-only decisions and forgetting that there are other (hard-to-measure) aspects to owning these assets.
- Mindset: Successful market timers view the (financial or real estate) markets as their “business”. They make money from it. Therefore, they make decisions from a business perspective. The Average family, on the other hand, is looking at buying stocks for their retirement portfolio or their next home and they are trying to weigh their decisions on a much more personal level, which makes the stakes seem higher.
- Buying a range instead of a single price point: Successful market timers don’t look to one specific price point as THE bottom or THE top. Rather, they expect to buy a range, buying through the bottom and selling through the top and fully realizing that they might miss a few points here or there but overall they are hitting it at the right time. Mr. and Ms. Average, though, see every single low price point as a question (“is this the bottom or will it get worse?”) and every single high price point as the top (“is this the top or will it continue to climb?”). In a way, they are making a technical trading decision without any technical information.
Don’t bother trying. You cannot time the market… at least, not in the way that you want to time the market.
Image credit: 2020VG