Why is timing the market so hard?

What market timing means

Market timing is moving money out of investments and back in, on a view of where prices go next. The usual pattern is to sell shares when a fall looks likely, hold cash, and buy back once prices seem to have reached the bottom.

This guide is about that pattern. It is not about the gradual move into lower-risk funds that many pension default funds make as a saver nears retirement, which MoneyHelper calls lifestyling.

Why it takes two right calls

Selling is the first call. It pays only if prices fall below the level sold at, by more than the cost of selling and buying back.

Buying back is the second. It pays only if it happens before prices climb back past the level sold at.

Each call can go wrong on its own:

• The fall never comes, and prices rise while the money sits in cash.
• The fall comes, but the investor waits for better news and buys back above the price they sold at.
• The fall comes and the investor buys back near the bottom, which is the only outcome that beats staying invested.

The second case is the one the question is about. Being right about the crash does not help if the recovery is missed.

A worked illustration

The figures below are invented to show the arithmetic. They are not a forecast and not a record of any real market, and they leave out dealing costs, tax, interest on cash and dividends.

An investor holds £1,000 of a fund priced at £100 a unit and sells all of it. A year later the price stands at £110. What they end with depends on when they bought back, and at what price. Units are rounded to four places.

In the first row the price fell to £80 and the investor bought back at £85, so £1,000 bought 11.7647 units, worth £1,294 at £110. In the second the fall arrived exactly as expected, but the investor waited for better news and bought back at £105, after the recovery had begun. They still end £52 behind for every £1,000 sold. In the third no fall came, and the money bought fewer units than it had sold.

The odds of two right calls

Suppose, as a further invented figure, that someone is right 60% of the time on each call, and that the two calls are independent. The chance of getting both right is 0.6 × 0.6 = 0.36, or 36%. The chance of getting at least one wrong is 1 − 0.36 = 0.64, or 64%.

Real decisions are rarely independent, and being right is a matter of degree as well as direction. The arithmetic shows only that two hurdles are harder to clear than one.

Why the second call is often harder

A sale is often prompted by a clear worry. There is rarely an equally clear signal that the bottom has passed. MoneyHelper makes the point that no one knows what markets will do over the coming weeks and months, and that investments may recover before the money is needed, with no guarantee either way.

Prices also reflect what other investors already expect. A crash that many people see coming may already be partly in the price by the time someone sells.

The costs of moving in and out

Each round trip has costs that staying invested does not:

• Dealing charges, and the gap between buying and selling prices, apply on the way out and again on the way back in.
• Selling shares held outside an ISA can make a gain liable to capital gains tax. The tax falls on the gain, the rise in value, not on the whole sale. It is due only when a year’s gains, after losses and reliefs, pass the tax-free allowance, £3,000 in 2026/27 across the UK.
• Shares held in an ISA are free of capital gains tax when sold.
• Buying the same shares back within 30 days of selling them brings special rules for working out their cost for tax.
• Money held in cash may earn interest, but it misses any dividends and any rise in prices while it is out.

Inside a pension, the equivalent move is a switch between funds. MoneyHelper notes that a switch to lower-risk funds can soften the effect of a fall, that a saver is then unlikely to gain much from a recovery, and that a switch can carry a cost.

Money needed soon, and borrowed money

A worry about a crash is sometimes a sign of a different issue. It can show that money due to be spent soon is held in investments whose value rises and falls.

MoneyHelper describes investments as usually for the long term and says they put capital at risk, so a balance can go up and down. Money set aside for living costs or a known bill has little time to wait for a recovery.

How money is split between shares, bonds and cash is called asset allocation. When money is needed soon, a worry about a fall raises a question about that split rather than about when to trade. Reviewing the split is a separate decision from timing the market.

Borrowed money adds a further layer of risk. When an investment bought with a loan falls, the loan is still owed in full, so the loss lands on the investor’s own money and is magnified. MoneyHelper says of high-risk products that an investor has to accept they might end up with nothing, or even owing money.

Trying for a quick gain when prices stand at a record high, with money that is borrowed or set aside for living costs, carries each of these risks at once.

Where your own circumstances come in

How much any of this matters depends on the person. It turns on when the money is needed, what other savings sit alongside it, how a pension is invested and which accounts hold the investments.

This guide informs. It explains how market timing works and what it involves, and does not say whether to buy, sell or hold. MoneyHelper gives free, impartial guidance, including Pension Wise for people with a defined contribution pension, and a regulated financial adviser can advise on your own case.

How Landfall handles it

The plan page assumes growth is exactly as you set it, every year. The stress test does not. It runs the same plan hundreds or thousands of times, drawing a different run of returns each time, and reports how often the money lasted. It is also called a Monte Carlo simulation. What varies, and what never does.

Every share on the Stress test page comes from this model of markets and the assumptions you set.