For a rising portfolio

Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor.

Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.

Topic: Growth Stocks

Why a Market Timing Strategy Leads to Poor investment Returns

Forget relying on a market timing strategy to boost returns. Focus instead on these proven tips for successful investing.

Market timing is the practice of trying to predict future trends and turning points in stock prices. For most people, this is a wasted, if not harmful, effort.

Random events tend to occur in bunches. A market timing strategy generates a lot of random buy and sell signals. Some are bound to work out well. But few work out well enough to offset losses on the inevitable erroneous signals, and leave a decent profit leftover.

For a rising portfolio

Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor.

Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.

Why successful investors stay away from a market timing strategy

The practice of market timing consists of coming up with and acting on a series of guesses (or estimates, or probability assessments) to use in your buying and selling decisions. Market timing theory attempts to interpret and detect buy and sell signals in trading patterns and history. Some of the decisions you make with the help of market timing will bring you profits, and others will cost you money.

Market timing can pay off sporadically, of course. Although the results are largely random, successes and failures are apt to come in spurts. The worst thing that can happen to you near the start of an investing career is that you make a series of successful timing decisions. This may lead you to believe that you have a natural talent for market timing, or that you’ve stumbled on a timing process that’s a guaranteed money-maker. Either of these conclusions can spur you to back your future timing decisions with growing amounts of money.

A significant market setback of, say, 10% or more will come along eventually. Unfortunately, no one can consistently say when that will be. Trying to foresee setbacks is sure to cost you money, however. That’s because many of the setbacks you foresee won’t occur. If you act on your prediction and sell, you’ll miss out on profits. You may buy back in at higher prices, just in time to be in the market when the next setback does occur. That’s known as a “double whipsaw.”

Eventually it happens to a lot of market timers. Some react by giving up on market timing. Others just give up on investing.

The best market timing strategy I can offer is to buy steadily and carefully throughout your working years, and sell gradually in retirement. That approach is virtually certain to enhance your investing profits. For one thing, it stops you from selling all your stocks near a market bottom, which market timers do from time to time.

How to be a successful investor without using a market timing strategy

Instead of trying to master market timing, you are far better off to study the earmarks of successful investments. Your long-term investment results will improve a great deal if you simply learn to spot and recognize these earmarks, and understand how they differ from the common risk factors in unsuccessful investments.

Here’s a look at some ways to make better investments.

Dividends: A history of steady if not rising dividends is one of those key earmarks that successful investors use to distinguish good stocks from bad.

One of the best ways of picking a quality Canadian dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Dividends are cash outlays that an unsuccessful company could never produce. A sustained history of dividend payments is one thing that all the best dividend stocks have in common.

We look for dividend stocks that have industry prominence, if not dominance. Our reasoning, besides brand recognition, is that major companies can influence legislation, industry trends, etc., to suit themselves.

Spinoffs: We can still say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing.

When a company carries out a spinoff, it sets up one of its subsidiaries or divisions as a separate firm, then hands out shares in the new company to its own shareholders. It may hand out the shares as a special dividend or give its investors an opportunity to swap shares of the parent company for the shares of the newly established spinoff.

Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years. (For that matter, the parent companies also tend to outperform comparable firms for several years after a spinoff.)

Conservative investing: In our view, your goal as investor, particularly if you follow a conservative investing strategy like the one we recommend, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meagre profits or losses.

Our advice is that the best way to try to outperform is to apply our Successful Investor philosophy: invest mainly in well-established companies; spread your money out across most if not all of the five main economic sectors (Manufacturing, Resources, Consumer, Finance and Utilities); and downplay or avoid stocks in the broker/media limelight, where unpleasant surprises can lead to big declines. But applying these principles to buying stocks requires a good deal of judgment and attention. Even then, you won’t beat the market every year.

Have you ever used a market timing strategy successfully? When?


Tell Us What YOU Think

You must be logged in to post a comment.

Please be respectful with your comments and help us keep this an area that everyone can enjoy. If you believe a comment is abusive or otherwise violates our Terms of Use, please click here to report it to the administrator.