TheStockAdvisor Advice

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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