Whats the danger of using a market timing strategy?
The goal of a market timer is to enter the market when it is rising, and exit when it is falling. While the strategy sounds appealing, it is difficult to execute, since no one has been able to devise a system that can tell in advance if the market will rise or fall. Market timers therefore tend to follow the trends, bailing out after the market has started to fall, and jumping in after it has started to rise. However, the stock market movements are jerky, not smooth, and allow little time for even the most prescient market timer to act. Thus, one of the major risks of this kind of strategy is that it may have an investor out of the market when the bulls stampede. One study examined the distributions of monthly stock returns for the S&P 500 and small stocks since 1926. The researchers discovered that the best returns on the S&P 500 were concentrated in only a few months. Small stock returns were shown to have been even more concentrated than the S&P returns. Probably the biggest risk of
