Market timing: can you pick the right moment?

Basics8 min read · updated 12 September 2026 · 7 sources

Market timing means getting out before prices fall and getting back in before they rise. The idea is tempting: take the gains, avoid the losses. In practice, hardly anyone manages it consistently. If you miss the few very good trading days, you lose a large part of the long-term return. And those days often fall right in the middle of crises. Here are the calculations and the studies behind this.

What market timing is

With market timing, you switch between equities and safe assets such as an instant-access savings account depending on your view. The decision can be based on gut feeling, news, forecasts or fixed rules. The alternative is buy and hold (“time in the market, not timing the market”): staying invested and maintaining a fixed allocation through rebalancing.

In a broader sense, market timing also includes waiting for a better moment before investing, for example because you expect a crash. This case is covered in the article Savings plan or lump sum.

A few days decide the return

The return of a year or a decade is not spread evenly. A large part of it comes from a few very good days or months. A simple example with twelve monthly returns shows the effect:

Estrada (2008) examined this with real data: over 160,000 daily returns from 15 international stock markets. Averaged across the markets, investors who missed the ten best days ended up with 50.8% less wealth than a passive investor. Those who avoided the ten worst days had 150.4% more. Ten days are less than 0.1% of all the trading days studied. Estrada's conclusion: the odds against successful market timing are overwhelming.

The problem: the best and worst days usually lie close together, in periods of high volatility. If you get out after a crash, you often miss the sharp rebound a few days later. Getting out and getting back in are two decisions, and both have to be right.

How often would you need to be right?

A simple model calculation shows how high the hit rate has to be. Suppose equities rise by 15% in 70% of years and fall by 10% in 30% of years; cash in a savings account earns 2%. A timer predicts every year whether the market will rise or fall and is right at a certain rate.

In this example, the timer has to be right in 71.7% of years just to match buy and hold, and that is before costs and taxes. The reason: because equities rise more often than they fall, every wrong “out” costs more than a wrong “in”. Using a similar line of reasoning, Sharpe (1975) had already concluded that a market timer has to be right very often for all the switching to pay off compared with buy and hold.

The figures are a simplified worked example (average without compounding, assumed returns). They show the principle, not the results of any particular market.

What research shows about investors

Studies of how investors actually behave confirm the theory. Dichev (2007) compared market returns with investors' money-weighted returns, i.e. with what was actually earned after all inflows and outflows. In almost all major markets, these were systematically below market returns, because money tended to flow in after good periods and out after bad ones. The difference between the two types of return is explained in the article on time-weighted return.

Barber and Odean (2000) analysed the accounts of 66,465 households at a US discount broker from 1991 to 1996. The households that traded most earned 11.4% a year, against 17.9% for the market. Their conclusion, in essence: trading is hazardous to your wealth. They identify overconfidence as the cause. This fits with the prospect theory of Kahneman and Tversky (1979): losses hurt more than equally large gains please. That tempts people to sell in crises.

Rules instead of gut feeling: tactical allocation

Not all timing is based on forecasts. Rules-based approaches react mechanically to signals from prices themselves, such as a moving average or the momentum of the past twelve months. Faber (2007) tested a model using the ten-month average across several asset classes and found better risk-adjusted returns, above all smaller drawdowns. Moskowitz et al. (2012) documented time-series momentum over one to twelve months in 58 liquid futures markets.

Such rules have two advantages: they are fixed in advance and can be tested in a backtest. But they also have limits. They lag behind turning points, generate many false signals in sideways markets and incur trading fees and taxes. And they often look better in a backtest than they do later, because parameters were fitted to the past (see backtest overfitting). This is covered in detail in the articles Momentum strategies and Trend following.

Valuation as a slow signal

Another form is timing by valuation: fewer equities when they are expensive, more when they are cheap. Metrics such as the Shiller P/E (CAPE) have some relationship with returns over the following ten years, but hardly any with those of the next year. Valuations can stay high for a long time. If you get out early because of them, you may miss years of good returns. Valuation is therefore of little use for short-term timing, but more suitable for gradually adjusting your equity allocation.

Hidden costs: taxes and fees

In Germany, every exit from a fund at a profit triggers tax. The money that goes to the tax office is missing when you get back in and no longer works for you. If you do not sell, on the other hand, you defer the tax until the end and let it keep compounding in the meantime.

On top of that come order fees and the bid-ask spread on every purchase and sale. With a few switches a year, this is small, but with frequent back and forth it adds up. More on taxation under Flat-rate tax and partial exemption.

The psychology of getting out

Market timing rarely starts with analysis; it starts with a feeling: headlines about a crisis, a portfolio in the red, friends who have sold. Getting out brings short-term relief. Getting back in is the hard part: if prices rise, you wait for a pullback that may never come; if they keep falling, the danger seems even greater. Many investors therefore stay out for a long time after selling. A written investment strategy with a fixed allocation helps you avoid making such decisions under stress.

What helps instead

• A suitable equity allocation: choose your mix so that you can sit through a severe decline without selling (see 60/40 portfolio and maximum drawdown).
• Rebalancing: fixed weights force you to act countercyclically without any forecast, i.e. to sell winners and buy more of the losers.
• Automate: a savings plan invests regularly, regardless of the headlines.
• Check rarely: if you look at your portfolio less often, fluctuations feel less threatening.

How Portfolio Lab calculates

On the Tactical page you can test rules-based models: moving average, dual momentum, relative strength rotation, target volatility, adaptive allocation, a model based on the Shiller CAPE, four rotation models (Protective, Vigilant and Defensive Asset Allocation (PAA, VAA, DAA) and Accelerating Dual Momentum) and a regime model (hidden Markov model). Each model calculates the weights at the end of the month using only prices up to that day and implements them at the closing price of the same month end, i.e. without looking into the future. You compare the result directly with buy and hold; the details are in the tactical allocation methodology.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.