The capital market · · 7 min read
Market timing: why knowing when to get in and out is so hard
See why market timing defeats even professionals: two calls you must get right, strong days next to weak ones, and the written rule people use instead.
Two browser tabs are open. One says "Indices hit an all-time high." The other says "Analysts warn a correction is coming." In between, in your current account, sits the money you decided to invest a few months ago. Every week looks like the wrong week. When the market rises, "it's too late now". When it falls, "better wait until it calms down".
Behind all this is a story someone told you: smart people know when to get in and when to get out, and if you read enough and follow enough commentators, you will know too. So you read. And each of those evenings ends with the same sentence: "We just don't understand markets well enough."
There is a part of you that gains something from waiting, even if it does not look that way. As long as you wait, you cannot regret a decision. "Let's give it another month" protects you from the morning when you finally go in and the next day everything is red. That caution makes sense, and what it guards is real. And there is a part of you that just wants the money to start working, without checking every morning whether today is the day. Both are right, and both are worn out by the same word: when.
What market timing actually asks of you
This is not a gap in your knowledge. The shape of the question is what trips people up. For getting out "in time" to work, you have to be right twice: once on the way out, and once on the way back in. Someone who left before a fall and returned after the market had already recovered was right once, and can still end up behind someone who never moved.
There is more. In historical data for the major US stock indices, days of sharp gains have often arrived close to days of sharp losses, inside the same turbulent stretches. People who stepped out to avoid the hard days sometimes missed the days that came straight after them as well. That is a description of the past, and history is not a forecast.
There is also a measurement that repeats year after year. Morningstar's "Mind the Gap" study of funds in the United States compares a fund's own return with the return its investors actually received, and keeps finding that investors got less than the fund itself. Part of the gap is put down to timing: money arriving after rises and leaving after falls. That is data from another market and from periods that are over, not a promise and not a forecast.
And the news does not help, because news describes today. If your horizon is ten or twenty years, a headline is a good answer to "what happened yesterday" and a poor one to "what do we do with money for twenty years".
Instead of a forecast: a written investment rule
A forecast tries to know what will happen. A rule decides in advance what you will do, whatever happens. A forecast needs updating every day. A rule is written once and reviewed once a year.
Psychologist Peter Gollwitzer described in 1999, in American Psychologist, what he called "implementation intentions": a decision phrased ahead of time as "if X happens, then I will do Y". The decision moves from the noisy moment to the calm one in which it was written, and so it tends to hold better than a general intention.
A forecast or a written rule
| Aspect | Going by a forecast | Going by a written rule |
|---|---|---|
| When you decide | Every time there is a headline | Once, on a quiet day |
| What sets the step | Whatever feels right today | Whatever is on the page |
| On a frightening day | You agonise all over again | You read the rule |
| How often you must be right | On every entry and every exit | Never; the rule does not guess |
| When you review it | Daily | Once a year, by what changed in your life |
Going by a forecast
- When you decide
- Every time there is a headline
- What sets the step
- Whatever feels right today
- On a frightening day
- You agonise all over again
- How often you must be right
- On every entry and every exit
- When you review it
- Daily
One page, written on a quiet day
The goal is one page, four lines, written this week on a day when the market is not in the news. Without following headlines to decide, without waiting for a signal, and without becoming people who understand markets. And if regret is what you fear, this gives you something important: on the bad day there is nothing to decide. The decision was made in advance, calmly.
What people who write a rule like this describe is that on deposit day they read the rule, not the news. What goes into it, and whether to invest at all, is your decision. This is general information, not personal advice.
The four lines people write for themselves
Line 1: a date in the month
What people describe is a fixed date, often a few days after payday. "The 12th of every month." A date that does not depend on what the market did this week.
Line 2: an amount
A fixed sum, or a percentage of income. People with a dated goal usually work backwards from it.
In AlphaHome: on the Savings Plan page you enter a target, a date and an expected annual return, which is an assumption you choose rather than a promise, and the page works out the monthly deposit required and shows a month-by-month and yearly projection. That is the figure for line two. The date in the month and the condition come from your written rule, not from the screen, and the page does not make any deposit.
Line 3: a condition
The condition under which the rule applies. One that comes up often: "as long as the emergency fund is full". That way the investing never competes with the cushion, and the month with the garage bill does not turn the rule into a problem.
Line 4: one if-then sentence
One sentence for the day the headlines are shouting. For example: "If there is a frightening headline on deposit day, we read the rule, not the article." Some people add another line about a day of sharp falls, written now rather than on that day.
Written out, as an example of the shape and not a suggested sum or date: "On the 12th of every month, 1,000 ILS, as long as the emergency fund is full. If there is a frightening headline on deposit day, we read the rule, not the article." Four parts, two sentences, and nothing about what the market did last month.
In a shared home, both partners read the page and agree to it. Once a year, on the same date, they read it again and ask whether anything in their lives has changed: income, goal, horizon. Not the market.
When the headline is louder than the rule
You broke the rule and waited, because the headline was too frightening. You waited because you did not want to regret it, and that is understandable. This is practice, not an exam. Today: reread the rule and mark the next date it applies in your calendar. What people in this position describe is returning to the rule on that next date, exactly as written; the decision is yours. Next time: add an if-then line about precisely the headline that made you wait.
You sold in a panic after a fall. The fear of loss was trying to protect what was left, and that is a legitimate wish. Today: write down what you felt and what happened, before any further step. What people in this position describe is making no further decision that evening; the decision is yours. Next time: a line in the rule about what you do on a day of sharp falls, written on a calm day.
The money is still in the current account and the rule is still unwritten. Waiting is a decision too; nobody has written it down yet. Today: only the first line, the date. The rest tomorrow. And if what is waiting is a large sum that arrived all at once, it has an article of its own.
We have a rule, and the headline does not write it
Whoever decides by the headline decides again with every headline. Whoever wrote a rule decides once. That is relief, not discipline: fewer open tabs, fewer "maybe tomorrow" evenings, and a deposit day that looks like any other day. If you want to see how a fixed monthly sum builds over the years at a return you assume yourself, the compound interest calculator shows it.
Our rule, in four lines
0 of 5 done
This week: one page called "Our rule" with the four lines. What people describe is pinning it up next to wherever they make the deposit; the decision is yours.
Do one thing this week
Open AlphaHome, record this month's income and fixed charges, and see how much is really free to spend. Everything in this article starts from that number.