I don't know anyone who's ever got it right. In fact, I don't know anyone who knows anyone who's ever got it right. - Jack Bogle, founder of the Vanguard Group.

In an article under the portfolios section of this FAQ I have prepared a spreadsheet (the article on asset returns) that shows the differences between good timing and bad timing on investment returns.

Most people hope to time the market by getting in on trends. They see that the market is moving down so they sell. They see it rally so they buy. In reality this is entirely the wrong way to do it, markets always turn when you least expect them to. Markets make superior investors and traders grow extremely wealthy, because millions of lemmings are willing to move in their suicidal herds to their own financial destruction. If you follow investor sentiment and buy when consensus says to buy, and sell when consensus says to sell, you will become part of that herd, to give your wealth to those who get out of the way and let you go right ahead.

Although plenty of gurus forecast the market, it is interesting to note that no really wealthy ones do. Market timing gurus promote themselves by flaunting their wealth and puffing themselves up for the camera, yet it is interesting to note that the most successful investors of all, like Warren Buffett and Peter Lynch, do not try to time the market at all. When you are up 100% on a couple of years ago, the penalty for withdrawing your funds (capital gains tax) is severe. One of the reasons why Buffett doesn't sell much stock is precisely because he does so well. If he loses 30% of his gain every time he sells then he misses out on a lot of dividend income and sacrifices an unacceptable amount of his trading capital.

Timing the market is best left to full time speculators. If you read "Share Trading: an Approach to Buying and Selling" by Daryl Guppy you'll see that timing is a field that requires an extremely close eye on the market and very careful attention to money management. If anyone thinks they can compete in the rat race of trading, then they had better be very certain of their carefully worked out trading plan. Certainly market timing should not be confused with investing.

Because of the difficulty of forecasting markets and the exit penalty your incur through taxation, in most cases it is best not to even try to time the markets at all. If Buffett can become a billionaire by buying and holding, and spending the majority of his time sitting around doing nothing at all, then why should anyone wish to do otherwise? Traders brag of their enormous wealth created by beating the market by an enormous margin, and good luck to them. But not one of these traders has ever established a track record that can rival what many long term stock investors have achieved by selecting a few good stocks and holding onto them. In the end the majority of traders lose their money because they expose themselves to great timing risk. Even with a one in a hundred chance of losing, if you play Russian Roulette long enough you will eventually get to the chamber with the bullet.

By not timing the market but instead regularly placing your money into a long term investment vehicle, you will come to enjoy downturns as a chance to buy cheap stock or units in the trust, and dislike market peaks as a time when it becomes harder to afford to buy as much as you would like. The longer your time frame, the more you can afford to think like this, and the greater your chances of accumulating huge wealth. The majority of large companies do not go bust, though many do get taken over by larger companies. A diversified investment like an index tracker fund is a great way to save for the long term, as you will get franked dividends all the time, regardless of what the fickle market wants to do with prices in the short term, and more or less independent of the fortunes of any one company.

Contrarian investing (mentioned in the shares FAQ as well as in that spreadsheet) is a fairly reliable way to get away from the herd and into investments ready for a bounce. It has worked well for decades, way back beyond the 20 years I have looked at in the spreadsheet. Even so, you might want to take into account capital gains taxes and switching fees when adopting a strategy like this. If you had bought an index fund in 1980 and held for all this time you would have paid no capital gains tax at all, only the occasional distribution as a stock leaves the index as well as tax on the dividends (mostly fully franked, though we'll ignore the fact that franking hasn't been around all that long). A working lifetime spent accumulating units in a low MER index tracker fund and reinvesting dividends should be enough to eventually provide a tax free income sufficient to retire off when you do start living off the dividends as your wage. It is amazing that such complex yet ineffective techniques can flourish when the answer really does stare us in the face. The reason of course why people do look beyond the completely obvious and quite safe is that they cannot wait and demand immediate wealth, greed is a powerful motivating factor.

Although I strongly believe in contrarian investing as a method of pseudo-timing the markets, I think capital gains tax would be just the right spanner to jam the works of this strategy. It has returned 4% above the rate of returns of an MSCI index tracker for all this time, yet you would lose half your gains through taxes each year. I suspect that it would be sensible for the trustee of a self-managed super fund to do this as the tax rate in super is "only" 15%, compared to the higher rates of a personal investor. Nonetheless, investing in an index fund and having all the income reinvested sounds like a far easier strategy than even a once a year switch like contrarianism. Unless trading is what you want to do full time, accumulating your money in something diversified and sensible should be the easiest and least risky investment possible, as well as something that entirely absolves you of having to do any work at all.

I'll leave you with one more thought, from none other than the most famous short term trader of all time, Jesse Livermore. If someone like him can attest that it is often best to let the market give you money rather than always chase it yourself, then this should be a perfect endorsement of the wonders of doing absolutely nothing at all.

It was never my thinking that made me my money. It was my sitting. - Jesse Livermore