Those who hold stocks for the long term tell us that market timing is not necessary, in fact, it does not work at all. The majority of us accept that as reasonable. Investors don't consider what it would mean to refrain from market timing.
Maintaining focus
Staying with the same stock allocation at all times is the best way to avoid market timing. These individuals are known as Buy-and-Holders. If stock investment risk remained the same at all times, staying with the same stock allocation would certainly be a case of Staying the Course. Long-term returns are affected by valuations. Therefore, investing in stocks at high prices carries a greater risk. A meaningful way to maintain focus is to reduce stock allocations when prices rise to super high levels in order to maintain a constant risk profile.
Injunctions against market timing will never be accepted by all investors. The extent to which investors participate in the market should be adjusted in response to changes in the level of risk in the market. In spite of this, millions of investors adhere to the Buy-and-Hold rule. A majority of investors set their stock allocation once and leave it that way for the rest of their lives.
Buying and selling take place in a market. All transactions are interconnected. The buys you make today impact the buys you make tomorrow, and the sells that you make today impact the sells you make tomorrow. However, the opposite is true for Buy-and-Holders. Regardless of how today's buys and sells go, Buy-and-Holders will continue to buy stocks tomorrow, next week, next month, and next year. A Buy-and-Holder does not consider the market to be alive. In other words, it's dead, unchanging, and fixed.
Adaptability is the genius of any market. Whenever new oil is discovered, other energy sources become cheaper or more expensive, or geopolitical realities change, the oil market adjusts to ensure the supply is steady. It is this type of behavior that is destroyed by the "no market timing". As circumstances change, so should the stock market. The question is, how is it possible when so many investors have pledged to buy the same amount of stocks regardless of the price charged? By imposing a "no market timing" injunction, the stock market is transformed into something other than a true market.
A few adjustments will be necessary eventually. As an investor, you may follow the Buy-and-Hold injunction. Nevertheless, denying reality by not adapting to changed circumstances is denying reality. It is inevitable that reality will demand to be heard sooner or later. As a result, we see such drastic price drops in the stock market. There is a crash in the market when a large number of investors decide to change their stock allocation and a great deal of market timing occurs within a short period of time. Stock allocation changes that have been put off for months and months and months result in a price crash when so many of them occur at once that the entire economic system is unsettled.
Market Timing Is Key To Success
Market timing should be done as needed by everyone. All investors should aim to maintain the same risk profile at all times, which means lowering their stock allocations in response to large upward price swings and increasing them in response to large downward price swings. By engaging in more market timing, prices will self-regulate more quickly and price swings will be less dramatic. An environment with fewer dramatic price swings is a more stable market, a more risk-free market, and a more profitable market.
In the stock market, the feedback loop is extremely slow. Failure to engage in market timing carries a strong penalty. There are times, however, when this penalty does not apply for long periods of time, five years, ten years, or even more than ten years. Thus, the Buy-and-Hold dogma comes to be viewed as reasonable by investors. In order to understand how the market works in the long run, we need to look at research that examines how the market behaves over a long period of time.
Adapting to new circumstances requires market timing. Occasionally, taking a hard left makes perfect sense. The opposite may also be true at other times. Our stock market has been steered by this approach as a result of a peculiar and unfortunate set of historical realities. Stock markets, like all living things, require regulation. In order to keep the market on track, all investors must take responsibility. Through the effective use of market timing, we are able to accomplish this goal.
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