The risks of market timing

To understand what market timing is, you must first understand, precisely, how the stock market works. The market is a place where investors buy and sell stocks and other financial assets. The price of these assets is based on supply and demand, so it varies constantly. Market timing takes advantage of these fluctuations to buy or sell at the right time and make profits.The objective of this technique is to enter the market when prices are low and exit when they are high.

Markets always tend to exaggerate their reaction to any news, whether positive or negative, making it completely impossible to anticipate them. Hence the importance of focusing attention on the quality of the assets in the portfolio, and adopting a strategy of always being invested ('buy and hold'), which is the most effective to achieve good long-term returns.

As seen in the table, investors who missed the returns of the ten best days of the SP500 with positive behavior of any of the decades shown above obtained returns worse, even negative, with respect to investors who remained invested without making movements.

The above is a evidence of what usually happens with the erratic decision-making of many investors, which causes them to lose profitability due to short-term movements in their portfolios. As Benjamin Graham commented: “The investor's main problem, and even his worst enemy, is probably himself.”

On paper, it may seem like a simple technique and it can be tempting to make quick profits, but you have to keep in mind that predicting market movements is very difficult and depends on a large amount of money. from factors beyond our control; In this way, this type of operation can generate large losses if wrong decisions are made.