Market Timing and the Current Downturn

You may of heard about the never-ending debate about whether it is possible to time the market. That is, is it profitable to pick entry and exit points using some methodology, whether based on technical or fundamental analysis, or just pick good companies and ignore price volatility.

This debate is relevant now. If you believe that stocks are now below fair value or that a technical bottom is forming, this is a good time to dip your toes into the markets. I won't suggest whether you should do so since I am not a financial adviser nor particularly good at the required analysis and prognostication. Instead I want to look at this problem from a different perspective.

If you have ridden the market down, you have little cash to invest even if you want to do so. In effect, you are along for the ride. If you believe (not hope!) this is a short-term or long-term bottom, then you should stick with your positions or sell and immediately buy into similar but more beaten-down stocks.

On the other hand if you are in financial distress and you need cash, you are in a dilemma. You can cut back your living expenses or sell some of your stocks. There is also the choice of extending credit with a general loan or remortgaging your house, but these are very risky choices since the hole you are in will rapidly get much deeper if the market doesn't turn or even if it does so but too slowly for your needs.

If you are in this situation, you have my sympathies. However for my purposes here, there is an important lesson to be learned with respect to market timing.

The only price points that truly matter are the ones at which you buy and sell, regardless of whether you attempt to time the market and regardless of your choice of timing analysis. You are only impacted by short-term volatility if you are investing with money you can't afford to lose. You will therefore find yourself compelled to sell at prices the market chooses rather than at the prices you choose. No matter how you cut it, that is the essence of bad timing.