When it comes to timing, most investors ( Institutional investors included) are the worst. We tend to buy near the very top and sell near the bottom. The result, the average return for individual investors is 2.1 % ......before fees and inflation.
So , is there a way for us to "time" the market ? To know when to be in stocks and when to stay away ? The topic of "market timing" is a contrevertial one with investment "professionals". Looking at the definition of market timing , we read this : Market timing is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements.
No one can predict future market prices, no matter what method they use. What we can do however , is use some tools , such as moving averages, and REACT to price movement, prompting us to get in or get out of the market.
One very simple way to do this, is to use 10 month moving average(MA) again a market index , such as SP 500 , or Dow Jones Industrial. If the index is above it's 10 month MA at the end of the month , we stay invested in the market. If the index fall closes below it's 10 month MA at the end of the month, we sell and go in cash ( or invest is short term bonds) . Let see the result of this simple strategy.
we applied this strategy on SPX, which gives data from 1981. The blue arrow represent buy signals, and the purple arrows, sell signals. A quick look at the chart, and we can see that we would avoid the recent bear markets in 2001, 2008, and 2011. This strategy , will not get you in and out at the very bottom or top of the market, but give you sufficient time to react and close or open positions.
From 1991 till Jan 2016 , the strategy placed a total of 21 trades ( buy and sell), and is profitable 71 % of the time. The average trade lasted 16 months. The strategy return a total of 1300 % with a Max Drawdown of 23 % .
As you can see, determining when to go in and out of the market doesn't have to be complicated. This simple strategy will keep investors from making costly emotional decisions in the future.