Market Timing

Yale Economics Professor Favors Market Timing

Before the internet dot com and stock bubble burst, Yale economics professor Robert Shiller warned investors early on that the bull market was doomed to end in tears in his best selling business book, "Irrational Exuberance".

Professor Shiller provided another prediction that though stocks are at a five-year low, they remain historically expensive and could end the decade where they began. The Yale economics professor suggests that investors can still make profit in the stock market through market timing, that is, buying in and selling out of the market frequently. Market timing means selling during the upswings and buying on down-swings.

Market timing is attempting to predict the future direction of the market, typically through the use of technical indicators or economic data. Investors also practice market timing by the practice of switching among mutual fund asset classes in an attempt to profit from the changes in their market outlook.

Academics and investors in general have differing views on the viability of market timing strategies. Whether market timing is ever a viable investment strategy is controversial. Some may consider market timing to be a form of gambling based on pure chance because they do not believe in the possibility of predicting future financial prices. The efficient market theory suggests that financial prices often exhibit random walk behavior and thus can not be predicted with consistency.

Pragmatic economists consider market timing to be sensible in certain situations, such as an apparent stock market bubble. However, because the economy is a complex system that contains many factors, even at times of significant market optimism or pessimism, it often remains difficult, if not impossible, to predict the local maximum or minimum of future prices with any precision; a so-called stock bubble can last for many years before prices collapse.

Proponents of market timing argue that market timing is just another name for trading per se. They argue that attempting to predict future market price movements is what all traders do, regardless of whether they trade individual stocks or collections of stocks, or in other instruments, mutual funds. Thus if market timing is not a viable investment strategy, the proponents say, then neither is any of the trading on the various stock exchanges.

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