Investing Smart

In Smart Investing – Do Not Try Market Timing

Whether it is stock market timing, mutual fund market timing or any other types of market timing, market timing is a good idea in theory if you know the future. However, it is virtually impossible to pull this off consistently. Almost all who try market timing ultimately fail – with good reasons. Therefore, Smart Investing does not involve market timing.

What is market timing?

Market timing is investing in a way according to a prediction what the market is going to do. For example, an investor thinks large cap stocks will do well in the next 3 months and only invest in large cap stocks with no diversification or asset allocation. Since the investor ‘thinks’ the market will move to favor one investment asset class, he or she is putting all eggs in one basket. This is good if large cap is really in favor. But, what are the odds of that investor being right all the time? All it takes is one mistake for you to lose all your eggs which you put in one basket by market timing.

Why stock market timing or mutual fund marketing aren’t as good as having an asset allocation strategy

First of all, consider the stock market ’s overall, long term trend, which has been decidedly upward. Since the turn of the century, the stock market has risen approximately 70% of the time. That means if you exit the market, by way of market timing, betting it will go down, you have a 7-in-10 chance of being wrong!

Another lesson of stock market history is that stocks make most of their gains in short, dramatic spurts. Consequently, the price you pay for market timing yourself out of the market at the wrong time is enormous.

Between 1926 and 1993, according to a study by the University of Michigan for Towneley Capital Management, 99% of the stock markets ‘ gains occurred during the best 48 months. -Less than 6% of the total time period.

Based on his research, Nobel Prize-winning Economist William F. Sharpe concluded, “… a manager who attempts to time the market must be right roughly three times out of four, merely to match the overall performance of those competitors who don’t.”

What is the best general course of action aside market timing?

The best general course of action? Invest wisely, stay invested, but keep your ear to the floor, just in case. Having a good asset allocation strategy will help tremendously.

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