Why Exactly Is Market Timing So Difficult?
Bill Bengen explains
Why is market timing so difficult?
Financial planner Bill Bengen is known as the creator of one of the more well known ideas in personal finance: the “4% rule.” In an interview a while back, he described his personal experience with market timing during the 2008 financial crisis.
While many were caught by surprise when the market crashed in 2008, Bengen, impressively, says that he saw it coming: “I got my clients completely out of the market in late 2008. So they never suffered the losses that other folks did.”
But then came the hard part: “[In] 2010 I was starting to move back in but I never put them into a full allocation, which was a mistake. That was just a bad mistake on my part. I just didn’t have the process in place, didn’t know what to do. I had a good idea of how to get out of the market. But I didn’t have the other half of the process, which is essential, getting back in.”
That, in a nutshell, is why market timing is so difficult, and why I don’t recommend it. Even if you’re prescient enough to get one part of the trade right, it’s that much more difficult to get both right. That’s why I believe it’s better to choose an allocation and to stick with it, changing it only when your needs change, and not in response to an economic or market forecast.