Timing The Capital Market: A Trading Strategy with Pitfalls

Many traders are eager to reach exactly the perfect entry and exit times, ie to “time out” the market.

Surely you have heard the story before:

A friendly investor has managed to buy a stock at (local) lows, hold it for a while and then sell it at highs. He proudly tells you about his coup.

With awe, if not envy, listen to his story. This strategy is called “timing” the capital market.

In order to “time” the market, investors often use technical analysis indicators such as up or down trends, evaluate economic fundamentals or rely on luck.

Many investors are eager to reach exactly the perfect entry and exit times.

Accordingly, the frustration is great if you do not succeed.

And since it rarely succeeds, many market timers are frustrated and withdraw from the stock market.

Not even Warren Buffett succeeds in timing the market

In the history of the stock exchange, no investor has ever managed to buy successfully at low prices and sell at high prices with various stocks over a stock exchange cycle, ie over a stock exchange cycle.

Warren Buffett, the most successful investor of all time, also sees this.

And although he is by no means a one-man show, but is supported by hosts of analysts, strategists and market observers who advise him in his entry and exit times.

The bottom line is therefore: To enter and exit highs at lows belongs to the realm of stock market myths.

The cost of the market timing

Especially since we have not even talked about the cost of the market timing. Because these can be significant.

According to an analysis by Morningstar, a US financial information and analytics company, actively managed funds, which are guided by selected macroeconomic factors at their entry and exit points, outperform 1.5% per annum per annum as passive managed funds keep their holdings in the longer term.

This poor performance has two main causes:

1.  Opportunity costs : If an investor were to invest permanently in the US S & P 500 index, a broad stock index of the 500 largest US companies, he would have achieved an average annual price increase of 9.9% over the period 1995-2014.

However, if he missed the ten best days, his performance would fall to 6.1%.

This is because stock markets often tend to make particularly strong gains, especially during the volatile market phases.

Those who are not invested lose in the long run.

2. Transaction Costs: Numerous studies have shown that market-based funds outperform the stock market by up to 3% less than buy-and-hold approaches that buy and retain undervalued stocks.

In addition to the sometimes considerable direct and indirect costs for the purchase and sale of shares – in particular the bid-ask spread and brokerage or stock exchange fees – capital gains taxes are also responsible for this.

According to Morningstar, market-timing funds must reach a hit rate of over 70% to outperform passive funds.

A hard to reach hit rate.

So you see, you are much better off with the proven buy-and-hold strategy and a well-founded stock selection process.