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Timing The Market
The market can seem like a perpetual roller coaster, good
earning reports, up we go; worry over what Alan Greenspan
has to say, down we go; no interest rate hikes, up again;
fears of inflation, down again; over and over. What is an
investor to do?
Studies show that staying invested through market
fluctuations offers the best chance of earning the potential
returns the markets offer. 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; 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 an investing strategy in which the
investor tries to identify the best times to be in the
market and when to get out. Relying heavily on predictive
talents and market analysis, market timing is often utilized
by brokers, financial analysts, and mutual fund portfolio
managers to attempt to reap the greatest rewards for their
clients.
Those who favor market timing say
that successfully predicting the ups and downs of the market
can result in higher returns than other strategies. Within
market timing there are various degrees, ranging from 100%
in or 100% out, to those who simply shift their portfolio's
weights.
But, market timing has its
risks. Although professionals may be able to use market
timing to reap rewards, one of the biggest risks of this
strategy is potentially "missing" the market's
best-performing cycles. This means that an investor,
believing the market would go down, removes his investment
dollars and places them in more conservative investments.
While the money is out of stocks, the market instead enjoys
its best-performing months. The investor has, therefore,
incorrectly timed the market and "missed" those top months.
That is why perhaps the best move for most individual
investors - especially those striving toward long-term goals
- might be to purchase shares and hold onto them through
market cycles. This is commonly known as a "buy-and-hold"
strategy.
If you are not a professional money
manager, your best bet is probably to buy and hold. Through
a buy and hold strategy, you take advantage of the power of
compounding, or the ability of your invested money to make
money.
Buy and hold, however, does not
mean ignoring your investments. Remember to give your
portfolio regular checkups, as your investment needs will
change over time. Most experts say annual reviews are enough
to ensure that the investments you select will keep you on
track to meeting your goals.
For example, a young investor will
probably begin investing for longer-term goals such as
marriage, buying a house, and even retirement. The majority
of his portfolio will likely be in stocks and stock funds,
as history shows they have offered the best potential for
growth over time, even though they have also experienced the
widest short-term fluctuations. As he ages and gets closer
to each goal, he will want to revisit his portfolio to
rebalance assets as his financial needs warrant.
Clearly, time can be a better ally
than timing. The best approach to your portfolio is to arm
yourself with all the necessary information, and then take
your questions to an advisor to help with the final decision
making. Above all, remember that your investment decisions -
both long- and short-term - should be based on your
financial needs and your ability to accept the risks that go
along with each investment. Your financial advisor can help
you determine which investments are right for you.
Points to Remember
--Historically, a
buy-and-hold strategy has resulted in significantly higher
gains over the long run.
--A big risk of market timing is
missing out on the best-performing market cycles.
--Missing
even a few months can substantially affect portfolio
earnings.
--Market
timing strategies - which range from putting 100% of your
assets in or out of one asset class to allocation among a
variety of assets - are based upon market performance
expectations.
--Market
timing is best left to professional money managers.
--Though
buy-and-hold is a smart strategy, regular portfolio checkups
are necessary.
--Time
horizon is particularly important when determining asset
choices.
--Riskier
investments are more appropriate for longer-term goals.
--As
goals get closer, portfolios should be rebalanced.
--Even
in retirement, portfolios should contain investments for
earnings to keep pace with inflation.
--You
should consult your financial advisor when making asset
allocation decisions.
Though many debate the success of market timing vs. a
buy-and-hold strategy, forecasting the market undoubtedly
requires the kind of expertise that portfolio managers use
on a daily basis. Individual investors might best leave
market timing to the experts - and focus instead on their
personal financial goals.
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