Is it possible to time the market?

Published: April 13, 2016 at 10:58 am

Last Updated on September 4, 2018 at 10:15 am

Why do people time the market? That is, why do they enter and exit the market based on certain signals (moving averages, PE etc.)? Is it for getting better returns? Or is it for getting risk adjusted returns?

This is a poll I created in Facebook group Asan Ideas for Wealth. As expected, a majority of members believed that timing the market is for getting better returns.

In this post, I would like to answer this question with a digest of a research paper. I am not interested in individual investor experiences either in the US market or in the much younger Indian markets. Relying on those, in my insignificant opinion, is not the ‘scientific’ way to answer the titular questions. I am only interested in studies backed by academic rigour. If you don’t agree, so be it. I can live with that.

I will not consider back-testing results from Indian market history. It is too short to be statistically significant. If you argue, that the Indian market is different from the US market, I can argue, ‘then why is it all trading metrics are derived from backtesting studies of the US market!’.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

The academic community is divided in its answer. For every report that says ‘one can time the market’, I can give you a report that says ‘one cannot time the market’.

Naturally AMCs and mutual fund sales are expected to say, stick to you SIPs and do not time. Needless to say, such opinions can rejected straightaway.

It is important for the reader to understand that, even those papers which say  ‘timing works’, only refer to superior risk adjusted return with market timing. Not superior return.

Risk adjusted return is a ratio – return per unit risk and is not the same as return. Crudely, price to earnings (PE) is analogous to risk-adjusted return which is distinctly different from the (stock/index) price.Read more: What is a risk-adjusted return

The most popular timing model paper is by M. T. Faber, “A Quantitative Approach to Tactical Asset Allocation”, Journal of Wealth Management, 9 (4), 69–79. (You can download this paper via above link). Ramesh Mangal tells me that this is is one of the most-downloaded papers from the SSRN network.

Faber uses a 10-month simple moving average (SMA) to time the market. This, for example is one of the simplest strategies he has used.

Monthly price > 10-month SMA –> Buy

Monthly price < 10-month SMA –> Sell and move to cash

When I read his paper, the most striking result was on page 28:

Appendix B breaks down the returns down by decade for the S&P 500 and the timing model. While the timing model outperforms in about half of all decades on an absolute basis, it improves risk-adjusted returns in about two-thirds of all decades and improves drawdown in all but two decades

The timing model improved return for only half the decades from the 1900s. This means, buying-and-holding outperformed the timing model in some decades and vice versa in other decades.

If I start to time the model today, I have no idea whether my strategy will fetch more returns (a common expectation) in the next 10 years. The chances are 50-50, if we go by past performance. As seen in yesterday’s post, “Will long-term equity investing always be successful?“, market dynamics are bound to change with time and past performance is unreliable in more ways than one.

Therefore, my key takeaway from Faber’s paper is, Market timing depends on how the stock market fares in the future (bull/bear/sideways). Since I do not know how it will fare in the future, success is down to luck.

I was looking for a research work to back my thinking. When Prashanth Krishna who runs portfolio yoga tweeted about a new paper on market timing: Revisiting the Profitability of Market Timing with Moving Averages.

When I corresponded with the author of the above paper, Prof. Valeriy Zakamulin, School of Business and Law, University of Agder, Norway, he cited his other work on market timing: A Comprehensive Look at the Empirical Performance of Moving Average Trading Strategies and sent me the original figures for this post!

They considered multiple market timing strategies like simple moving average, exponential moving average, double moving average (like the hurricane warning chart in the Nifty Valuation Analyzer) using the S&P 500  from Jan 1860 to Dec 2014 (155 years, 1860 months!). They divided the data set into two using statistical means.

The dotted lines divides the S&P 500 data set into two with approximately equal number of bull and bear phases
The evolution of the S&P 500 in two two periods. The bear phases are shaded.

Their main conclusions are listed below:

1. There is  strong evidence that the stock market dynamics are changing over time.

In the second half of the data set (panel B) the stock market was less volatile, the stock prices grew with a rate that was more than double as much as that over the first half, and the ratio of the average Bull market length to the average Bear market length was almost double as much as that over the first half.

2. Moving average strategies outperformed the market in the first period (panel A).There is no statistically significant evidence of outperformance in the second period (panel B)

Thereby our findings cast doubts that market timing strategies can consistently beat the market.

3. There is optimal moving average duration. For example,many think that the 200-day DMA is the ‘best’ to use. This cannot be justified.

4. “The outperformance delivered by market timing strategies is highly uneven over time. Most of the outperformance is generated mainly over relatively few particular historical episodes” Results depend crucially on the sample period chosen. Which is why many authors argue in favour of timing.

If one chooses the sample period to be, for instance, either 1900-2010, 1970-2010, or 1990-2010, and simulates, for example, the SMA(10 month) strategy, then one comes to conclusion that market timing works

If the sample period chosen is 25 years after 1970, then market timing fails. If the sample period is post 2000 then market timing wins. The point is, market timing works …sometimes. Since we do not know how the market will fare in future, is it impossible to claim market timing will work for my investment strategy!


If you have reached up to this point, thank you for your patience. There is no statistically rigorous evidence that market timing will work. If wish to enter and exit  following the PE  or moving averages, I strongly suggest you keep better risk adjusted portfolio return and (temporary) capital protection as the goal and not ‘higher returns’.

I am not recommending to time the market. Personally I will not time the market because it does not suit my temperament and I have better things to do.

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)