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