Market Timing

Market timing is the attempt to predict when the stock market will go up or down, and then buying or selling based on those predictions. The idea sounds simple: buy before the market rises, sell before it falls, and avoid all the painful drops. In practice, decades of research show that almost nobody can do this consistently, including professional fund managers.

Why it rarely works

Markets don’t move in predictable patterns. A large portion of long-term returns come from a small number of the best trading days, and those days are nearly impossible to predict in advance. Studies have shown that missing just the 10 best days in the market over a 20-year period can cut your total returns roughly in half.

The problem with sitting on the sidelines is that you need to be right twice: once when you sell (before a drop) and once when you buy back in (before the recovery). Even getting one of those decisions wrong can leave you worse off than if you’d simply stayed invested. Volatility is uncomfortable, but it’s a normal part of investing.

What works instead

For most investors, time in the market beats timing the market. Staying invested through ups and downs, and continuing to contribute regularly, has historically produced better results than jumping in and out.

Dollar-cost averaging is one practical approach. By investing a fixed amount on a regular schedule, you buy more shares when prices are low and fewer when they’re high, without needing to predict anything. Research suggests that lump-sum investing slightly outperforms dollar-cost averaging over the long run, but both approaches beat waiting for the “perfect” moment.

Why it matters

A concrete example

Say you invested $10,000 in a Canadian index fund on January 1, 2020. By mid-March, the market had dropped roughly 35% and your investment was worth about $6,500. If you panicked and sold, you locked in that loss. If you stayed invested, your $10,000 was worth roughly $12,000 by year-end. The recovery happened fast, and timing the re-entry was nearly impossible.

Market timing often feels like the smart move, especially during a bear market or correction. But the urge to time the market is one of the biggest threats to long-term returns. Having a plan you stick to matters more than having a prediction that turns out right. For more on this, see our pieces on time in the market and dollar-cost averaging vs. lump-sum investing.