Turn on the financial news and you’ll hear the same worries on repeat. AI bubbles. Bitcoin. Government debt. Trade wars. Geopolitical tensions. Should you sell when markets are this high?
This is nothing new. It’s a feature of capital markets and the noise that surrounds them.
At the end of the day, buyers and sellers come together and agree on a price based on the information they have and how they interpret it. With enough people involved, that information gets reflected in market prices. Put differently: if everyone believed there was a bubble, it would have already popped.
Two ways of thinking about markets
Some people believe markets are efficient. That any price changes reflect changes in the underlying risks and expected cash flows. In an efficient market, today’s prices reflect all known information. No one can know something the market doesn’t already know. Prices are always fair and justified.
Others argue that sentiment drives markets. That emotions ebb and flow over time, pushing prices up and down accordingly.
In reality, both are just models.
Does market timing actually work?
The evidence supports treating markets as if they’re effective enough at pricing information. Building an investment strategy on the opposite assumption doesn’t give you the best chance of success.
You might have sympathy for the idea that excitement and FOMO can push prices around. There’s definitely a risk that investors don’t fully understand what they’re getting into and could get hurt when momentum shifts sharply (which it can, and has).
This creates a temptation to act on the belief that prices are unjustifiably high. But the evidence is clear: very few people, if any, can reliably time these shifts and profit from them.
Recent research examined 720 market timing strategies across different equity markets and investment factors. Only 30 showed initial promise, and even those were highly sensitive to the specific time periods and methods used. Without rigorous testing, it’s easy to mistake random noise for a genuine signal.
The bigger picture
The future is uncertain. There are many plausible scenarios and a wide range of views about what might happen.
The good news is that investors who trust in reasonably efficient markets can rely on the collective intelligence of all market participants. That vast web of risks and probabilities gets distilled into a single number: the price.
It’s worth remembering that every decision to exit the market requires another decision about when to get back in.
John Bogle, founder of Vanguard, put it well:
The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible… I don’t even know anybody who knows anybody who has done it successfully and consistently.
The cost of getting it wrong, whether through emotional decisions or misplaced confidence in a system, can be high.
Maybe we’re in bubble territory. Maybe we’re not. Only hindsight will tell us with any confidence.
Stay the course.
