Tuesday, December 15, 2009

Is Timing Really Everything ?

One of the commonly spread concepts in investment is that "Timing is Everything". The mother of all laws in investment is "Buy Low Sell High", hence knowing WHEN to buy and WHEN to sell is key to everything. Although this seems very logical and correct but it may NOT be the Best strategy one should apply in investment, especially in personal finance.

Timing is indeed very important but it doesn't have to be "Everything".

Timing can be further categorized into (1) timing the exact moment and (2) timing a general period. For example, is current market just over its peak now vs generally the market is still rather high now. While it seems impossible to predict the exact future but its always simpler to get a sense of what may happen next.

I predict that The sun will rise tomorrow morning


The sun will be seen at 7:23am after the clouds are cleared off in 13 minutes

If an investor is Correct All The Time, focusing solely on timing would be a smart thing to do. Otherwise, timing become a variable that can help you as much as killing you. As a matter of fact, it will always help you sometimes and it will always kill you some other time. Hence, knowing what to do when your timing is right or wrong becomes even more important especially when you can't be Correct All The Time. Namely the profit take and cut lost strategies.

It takes 2 timings to get one complete transaction. Buying at the lowest today does not guarantee anything yet if it goes lower tomorrow. Selling (short) at the highest today may still have a higher tomorrows. Hence a perfect transaction that is built by 2 perfect timings can only be justified as an after event. In probability study, even if you can guarantee getting the timing Correct, but there is only half the chance you can get it Correct again twice in a row. In other words, even if you know 100% correct timing when to buy low, but there is only 50% chance that you can also sell high at the perfect timing.

So no matter which ways you look at it, "Timing is Everything" is Not a Guaranteed method. It can make you one in a million, but most people will not get anything positive out of this strategy especially long term wise.

Hence you may need to form an investment strategy that can cater for any timings and events. That would be a rock solid personal finance. If there are certain timings or events that your current profile cannot handle yet, then just temporary exclude investing during those timings and events. Until one day you learn enough to build a more solid personal finance to cater for those timings and events. Thats how malpf's wealth pyramid was introduced earlier, you start with something you don't really need to know like Fix Deposit and slowly learn more before handling mutual funds and stock investment.

However one of the positive human nature is to pursue greatness. Everyone want to hit jackpot no matter how slim the chances are. Timing may not be Everything but it is the Ultimate investment skill. Until today, there is no one formula for Guarantee Exact Timing (GET) in investment yet. And the person who come up with one will sit in the same hall with Newton and Einstein, most probably above all of them.

Hence, totally abandon timing an investment is as ignorant as adhere solely to it, if not worse. What should we do then ?

Build a rock solid personal finance first, then leave a 5% room in it as play money for you to practice timing in real life. This way, overall you will still have a good life ahead of you while not giving up any chances that you can be great! When you find out you are really good at timing, slowly increase your 5%. Otherwise lower the 5% or totally eliminate it especially when your 95% are not even earning more than 5%.

How about you ? How much are you relying on Timing in your life ?