What is “market timing”?
• Market Timing Has Its Risks • The Risk of Missing Out • Use Time to Your Advantage • Total Annual Return of the S&P 500 • Regular Evaluations Are Necessary • Time is Your Ally • Points to Remember Sports commentators often predict the big winners at the start of a season, only to see their forecasts fade away as their chosen teams lose. Similarly, 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 (or for those with a lucky rabbit’s foot); 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 the strategy of trying to predict the market to increase your profit, buying and selling frequently to take advantage of every rise and avoid every fall. It sounds great, but history shows that few investors — even professionals — can consistently time the market. The best way to build up your portfolio is to invest for the long term, not for the short.
Market timing strategies generally involve short-term trading of mutual funds to take advantage of short-term discrepancies between the expected current price of a security and the stale value of that security used in valuing the fund’s portfolio. International funds are vulnerable to this type of trading, as traders can exploit differences between time zones. Periodically, events that could reasonably be expected to impact the value of a security or an entire market occur after a security has been priced in a foreign market. Examples of events might be a major political announcement or resignation of people critical to the operation of a company. In these circumstances, the closing mutual fund price(s) may not fully reflect the expected current value(s) of the affected security(ies); these prices are sometimes referred to as ‘stale’ prices. Q: Why is market timing of concern? A: The movement of cash in-and-out of a fund is not optimal for the long-term operation of a fund. In some cas
