Market timing with your mutual funds
by
Tony
Reed
When investing in bonds, stocks, or mutual funds, investors
have the opportunity to increase their rate of return by
timing the market - investing when stock markets go up and
selling before they decline. A good investor can either
time the market prudently, select a good investment, or
employ a combination of both to increase his or her rate of
return. However, any attempt to increase your rate of
return by timing the market entails higher risk. Investors
who actively try to time the market should realize that
sometimes the unexpected does happen and they could lose
money or forgo an excellent return.
Timing the market is difficult. To be successful, you have
to make two investment decisions correctly: one to sell and
one to buy. If you get either wrong in the short term you
are out of luck. In addition, investors should realize
that:
1. Stock markets go up more often than they go down.
2. When stock markets decline they tend to decline very
quickly. That is, short-term losses are more severe than
short-term gains.
3. The bulk of the gains posted by the stock market are
posted in a very short time. In short, if you miss one or
two good days in the stock market you will forgo the bulk
of the gains.
Not many investors are good timers. "The Portable Pension
Fiduciary," by John H. Ilkiw, noted the results of a
comprehensive study of institutional investors, such as
mutual fund and pension fund managers. The study concluded
that the median money manager added some value by selecting
investments that outperform the market. The best money
managers added more than 2 percent per year due to stock
selection. However the median money manager lost value by
timing the market. Thus, investors should realize that
marketing timing can add value but that there are better
strategies that increase returns over the long term, incur
less risk, and have a higher probability of success.
One of the reasons why it is so difficult to time correctly
is due to the difficulty of removing emotion from your
investment decision. Investors who invest on emotion tend
to overreact: they invest when prices are high and sell
when prices are low. Professional money managers, who can
remove emotion from their investment decisions, can add
value by timing their investments correctly, but the bulk
of their excess rates of return are still generated through
security selection and other investment strategies.
Investors who want to increase their rate of return through
market timing should consider a good Tactical Asset
Allocation fund. These funds aim to add value by changing
the investment mix between cash, bonds, and stocks
following strict protocols and models, rather than
emotion-based market timing.
About the author: Tony Reed is the author of " Market timing with your mutual
funds", please visit his website Mutual Funds & Stock Trading for
more information.
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