Market timing is the aim of predicting where prices are going to go in the future. If you think they are going to go down, then you hold off buying an asset, if you think they are going to go up you hold off selling an asset.

We regularly get questions asking if now is a good/bad time to buy/sell stocks, currency, property, crypto, and other asset types, usually when something is making headlines. The answer is universally that nobody knows, which is why we don’t allow these posts in the subreddit.

The idea that future prices can’t be predicted is a surprisingly difficult one to accept – surely the experts and professionals must know? But with any asset class there are going to be unforeseen circumstances that will cause price movements contrary to expectations.

Investing in the stock market 📈

While on paper it looks like it would be great to stay invested in the market while it’s going up but sell in time to avoid any crashes, unfortunately in practice, this feat is impossible to pull off consistently in the long term. There is no system that can reliably predict future stock prices.

This has been extensively studied and written about. Check out our recommended resources for some book-length explanations. For a shorter introduction on why market timing is A Bad Idea, see this blog article on Bogleheads.

If that doesn’t convince you, maybe one of these pithy quotes will: The Smartest Things Ever Said About Market Timing from CBS.

Note that these principles don’t only apply to active or day traders looking to make money off short term fluctuations in prices, but also to long term investors who might be tempted to hold off investing and wait for the bottom of a crash before entering the market.

By waiting for the perfect time to invest, you can end up missing periods with high returns. When it comes to planning your personal finances and investing, you should remember this proverb:

The best time to plant a tree was twenty years ago. The second best time is now.

Pound Cost Averaging ⚖️

If you’re nervous about investing because the market appears to be too high, you could consider Pound Cost Averaging (also known as Dollar Cost Averaging) – drip feeding your investment into the market at pre-determined times and amounts. For example, if you had £10,000 to invest, you could choose to invest £1000 each month for 10 months.

That means if the market does drop, some of your money will be going in at those lower prices. On the flip side, if the market rises, your money will be going in at higher prices. By buying over a period of time , you are purchasing stocks at the average price over the period you’re drip feeding, instead of one specific point at the start of that time period.

This article from Vanguard provides more information about the pros and cons of lump sums vs averaging. TL;DR: statistically, if you have the money available upfront, you’re more likely to be better off investing it all rather than keeping some back. The market goes up more than it goes down (that’s why we invest!), so the average price over the course of a year is more likely to be higher than the price at the start of the year period.

However, ‘likely’ does not mean ‘certain’, and if a badly timed downturn would keep you up at night, averaging your purchase over a longer period is a very reasonable strategy to help you start investing and stick to your investing plan without getting tempted to time the market.

House prices 🏠

Even though you may be looking to buy a house to live in rather than make money from, the same principles apply. Nobody knows what house prices will do next. There are a large number of factors involved which aren’t necessarily predictable, and often very local.

You may be tempted to hold off buying in hopes that better properties will become more affordable in the future. This is risky because it is of course possible for prices to rise instead, and price you out of properties you would previously have been able to afford. (Or perhaps prices fall but sellers don’t put their houses on the market, or it gets harder to secure a mortgage).

Similarly it’s very risky to buy somewhere on the assumption that prices can only go up and that you’ll reliably be able to sell at a profit within a short space of time – prices can and do stagnate and even drop. Buying and selling also costs money so you will need a price increase just to break even.

What you can do:

• Work with today’s pricing. If you want to buy and can afford to buy somewhere you’d be happy to live for at least the next 5+ years, don’t assume a better deal is around the corner. (Of course if you want to chance waiting for something better to come along, you absolutely can! But don’t treat it as a certainty).
• Budget carefully and keep a full emergency fund so you’re confident you can afford the repayments on your mortgage. A drop in value of your home won’t affect you if you’re keeping up with the loan and not attempting to sell.
• Don’t buy if you’re intending or expecting to move away within 1-4 years. Longer time periods will give prices more time to recover from a fall, and for you to have paid off more of the loan and avoid being in negative equity.

Mortgage interest rates 📅

Struggling to decide between a 2 or 5 year fix, or between a fixed rate and a variable one?

It’s important to understand that the 2 and 5 year rates will already reflect the market’s best guess as to what future interest rates will be. If lenders are accounting for possible future interest rate rises, the 5 year rates will be higher than the 2 year rates. If they expect rates to go down, the rates may be the same, or even lower.

In theory, if interest rates in 2 years will be much higher than predicted, you’re better off fixing for longer now to lock in a lower rate. If they’re going to be lower, you’re better off fixing for a shorter time so you can take advantage of the lower rates when they become available, and avoid getting locked in to a higher rate.

This is a great theory but unfortunately it is impossible to reliably implement. There isn’t a way to tell which fix will end up looking cheapest in retrospect.

So this becomes a question of personal circumstances and preferences: do you prefer to go for the cheapest rate, or to pay a premium for a longer fix? Do you want to take a short fix that may allow you a cheaper deal in future, but risks being more expensive? Do you want to lock in the current rate to provide you with protection against future increases, while missing out on potential future decreases?

Note that there are some important additional considerations around your LTV and chances of moving house within the fixed rate period. See our mortgages page for more information about all this.

Crypto 🪙

Bitcoin, dogecoin, UKPFcoin… there has been a huge increase in interest in cryptocurrencies since the 2017 spike in bitcoin prices.

Regardless of your views on crypto, it is undeniably a very volatile asset to own and you should be careful not to let it dominate your portfolio and shouldn’t put too much faith in it reaching new highs or recovering previous losses.

Throughout history there have been assets that have reached insane values before crashing – see the Dutch tulip market – and there is no guarantee that cryptocurrencies will continue to grow.

The main problem with crypto as an “investment asset” is that as of yet, sustainably profitable use cases for crypto remain speculative and unproven, (although the space is rife with scams and ponzi schemes promising otherwise). Your single source of return therefore is the hope that somebody will buy it for more than you paid. In investing, this is called “the greater fool theory”

This contrasts to stocks and shares investments, where the price is to some extent based on expected future income streams, and owning the investment itself will produce returns, without the need to sell it for more than you paid.

Meme Stonks 🚀

Since the GME rally in January 2021, we’ve seen a massive uptick in people wanting to speculate on meme and penny stocks. If this is something you’re interested in, we would again suggest keeping this to a small part of your portfolio.

Note that there is no shortage of unscrupulous people ready to take advantage of excitement over a single stock. You should beware anyone trying to sell you courses, tips and strategies, etc. These are common scams, and in the unlikely event that the person running them is actually well-intentioned, it’s still not possible for them to deliver genuinely reliable tips on what prices will do next.

These stocks also suffer from the same problem as crypto, as the valuations rarely if ever reflect an anticipated future income stream.

Forex trading 📉

Forex (or ‘FX’) trading means buying and selling currencies in an attempt to make a profit off movements in the exchange rates.

Forex trading is heavily advertised on platforms like Instagram and YouTube. Unfortunately these ‘get rich quick’ schemes are invariably some form of scam – whether they make money off selling people their online courses, or by getting victims to pay into a scam investment scheme.

• Why Forex (Foreign Currency Trading) Is Useless and Dangerous for Most Investors
• How to spot a forex (FX) trading scam