Financial Opinion and Insights

Stock Selection or Market Timing? Which is Most Important?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®


You see the ads on tv for trading systems and you see the tv shows telling you which stocks to buy.  Which is most important?  Is it both?   

How about neither….   

The world is as full of armchair investors who think they can outsmart Wall Street as it is of amateur golfers who can hit a 300-yard drive and still not qualify for the mini-tour.    

In the world of investing, this is where education diverges from financial entertainment.    

Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower found in their study[1] that among well-qualified institutional portfolio managers, market timing could account for only 1.8% of the average return differential.  Security selection accounted for only 4.6%.  Portfolio allocation, however, accounted for 91.5% of the average return differential among these investors.  2.1% was due to all other factors combined.   

But, if you talk with your friends about stock selection or market timing, it’s interesting!  It’s fun!  It’s exciting!   Asset allocation conversations are dull.  No wonder you never hear it talked about on tv.   

How about economic cycles?  In 1991, Jeremy Siegel examined the relationship between stock prices and the business cycle.  While the stock market has been known to be a leading indicator, it’s also known to have given false signals, particularly with regard to impending recessions.   The market, however, seems to have been a better indicator of coming economic expansions.   

When do you jump-in?    Sorry, my crystal ball is in the shop – it’s been acting-up lately.    I wouldn’t suggest trying to time the markets.  Smarter people than us don’t do it very well – see the stats cited above.     My suggestion:  Stick with a disciplined process, combined with a long-term outlook, a solid plan, and realistic expectations…  and let the ‘timers’ and ‘pickers’  enjoy their exciting conversations at Happy Hour.   

If you’d like to learn what else to avoid – and what you should know – you might want to request a free copy of my report, Why Investors Fail.  Just use the `Request Info’ button on the IFG website!


[1] “Determinants of Portfolio Performance II: An Update”, Financial Analysts Journal (May-June 1991) pp 40-48. 

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