Timing The Market
The market can seem like a perpetual roller coaster, good earning reports, up
we go; worry over what the Fed has to say, down we go; no interest rate
hikes, up again; fears of inflation, down again; over and over. What is an
investor to do?
Studies show that staying invested through market fluctuations offers the
best chance of earning the potential returns the markets offer. Market timers
often try to predict big wins in the investment markets, only to be disappointed
by the reality of unexpected turns in performance. It's true that market timing
sometimes can be beneficial for seasoned investing experts; however, for those
who do not wish to subject their money to such a potentially risky strategy,
time - not timing - could be the best alternative.
Market timing is an investing strategy in which the investor tries to
identify the best times to be in the market and when to get out. Relying heavily
on predictive talents and market analysis, market timing is often utilized by
brokers, financial analysts, and mutual fund portfolio managers to attempt to
reap the greatest rewards for their clients.
Those who favor market timing say that
successfully predicting the ups and downs of the market can result in higher
returns than other strategies. Within market timing there are various degrees,
ranging from 100% in or 100% out, to those who simply shift their portfolio's
weights. But, market timing has its risks. Although professionals may be able to
use market timing to reap rewards, one of the biggest risks of this strategy is
potentially "missing" the market's best-performing cycles. This means
that an investor, believing the market would go down, removes his investment
dollars and places them in more conservative investments. While the money is out
of stocks, the market instead enjoys its best-performing months. The investor
has, therefore, incorrectly timed the market and "missed" those top
months. That is why perhaps the best move for most individual investors -
especially those striving toward long-term goals - might be to purchase shares
and hold onto them through market cycles. This is commonly known as a
If you are not a professional money manager, your best bet is probably to buy
and hold. Through a buy and hold strategy, you take advantage of the power of
compounding, or the ability of your invested money to make money.
Buy and hold, however, does not mean ignoring your investments. Remember to
give your portfolio regular checkups, as your investment needs will change over
time. Most experts say annual reviews are enough to ensure that the investments
you select will keep you on track to meeting your goals.
For example, a young investor will probably begin investing for longer-term
goals such as marriage, buying a house, and even retirement. The majority of his
portfolio will likely be in stocks and stock funds, as history shows they have
offered the best potential for growth over time, even though they have also
experienced the widest short-term fluctuations. As he ages and gets closer to
each goal, he will want to revisit his portfolio to rebalance assets as his
financial needs warrant.
Clearly, time can be a better ally than timing. The best approach to your
portfolio is to arm yourself with all the necessary information, and then take
your questions to an advisor to help with the final decision making. Above all,
remember that your investment decisions - both long- and short-term - should be
based on your financial needs and your ability to accept the risks that go along
with each investment. Your financial advisor can help you determine which
investments are right for you.
Points to Remember
a buy-and-hold strategy has resulted in significantly higher gains over the long
--A big risk of market timing is missing out on
the best-performing market cycles.
--Missing even a few months can substantially
affect portfolio earnings.
--Market timing strategies - which range from
putting 100% of your assets in or out of one asset class to allocation among a
variety of assets - are based upon market performance expectations.
--Market timing is best left to professional
--Though buy-and-hold is a smart strategy,
regular portfolio checkups are necessary.
--Time horizon is particularly important when
determining asset choices.
--Riskier investments are more appropriate for
--As goals get closer, portfolios should be
--Even in retirement, portfolios should contain
investments for earnings to keep pace with inflation.
--You should consult your financial advisor when
making asset allocation decisions.
Though many debate the success of market timing vs. a buy-and-hold strategy,
forecasting the market undoubtedly requires the kind of expertise that portfolio
managers use on a daily basis. Individual investors might best leave market
timing to the experts and focus instead on their personal financial goals.