I've heard it all and it's all garbage. Waiting for any realiable technical indicator of predictive value is going to kill your returns. It'll smash your portfolio to pieces and leave you an emotional tattered wreck. Investors invariably miss the best market days when they're waiting for a time that feels good to get invested. Recoveries and bull markets always climb walls of worry and by the time BNN is giving you good news and the talking heads are crying "buy" the big gains have already passed. Your gut is wrong, don't trust yourself, look at the slide below: If you miss just the best month of any given year the impact to your total return is huge. In some cases all or most of the calendar year return by missing just one month.
The long term view is even more dire. The next image illustrates the risk of attempting to time the stock market over the past 40 yrs and 6 months. An hypothetical $1 investment in stocks invested at the beginning of 1970 grew to $39.19 by June 2010. However, that same $1 investment would have only grown to $15.28 had it missed the eight best months. One dollar invested in cash over the same period would have done better at $15.62. The unsuccessful market timer, missing the best eight months of stock returns, would have recieved a return below that of cash and would disdainfully procalim, "markets are broken, it's all a big scam". The only scam is the one we unwittingly pull on ourselves.
Dangers of Market Timing
Hypothetical value of $1 invested from Jan 1970–June 2010
About the data
Stocks are represented by the S&P/TSX Composite Index and cash by the 90-day Canada Treasury bill—data from the Bank of Canada. An investment cannot be made directly in an index. The data presented herein assumes reinvestment of income and does not account for taxes or transaction costs.
I wish we were hardwired a little differently but that might just be too easy wouldn't it? Good investing is always going to be counter intutive. If your advisor is constantly adjusting your portfolio to suit your current forethought du jour, then your likely going to be following the crowd. Day to day your gut choices, confirmed by your advisor who just doesn't want to lose your business, will seem like good choices. But over the long term you'll be stymied and frustrated.
Next up, recognizing and ignoring the "noise"...
