Market Timing is a strategy by which investors try to predict future market movement and buy or sell based on those predictions. Is this a wise strategy? Bob Wamhoff, President of Wamhoff Financial Planning and Accounting Services, offers his advice.
- What is market timing based on?
- Investment professionals analyze data, including economic conditions, political climates, market trends, and other factors to try to predict where the market is going, making buy and sell decisions accordingly.
In some cases, especially where individual investors are concerned, it may potentially, be based more on emotion, fear and gut-feel rather than data.
- Market timing involves accurately predicting when to get into the market, when to get out, when to get back in again … and the cycle goes on. So there are many decision points where one must predict correctly.
- In most cases, even the best analysts, money managers, and advisors aren’t able to time the market accurately. Even if accurate predictions are made every time, which is unlikely, you don’t end up that much further ahead.
- Example: Louie the Loser from American Funds. They tracked a $10,000 per year investment over 20 years (1995-2015), and calculated return based on worst days to invest (at market highs) and best days to invest (market lows). When investing $10,000 in Investment Company of America each year on the worst days possible to invest, Louie’s average annual total return was 7.3%. When investing his $10,000 each year on the best days, the average annual total return was 9.0%. *
- Diversification, in and out of the market. This allows for greater balance and reduced risk to your entire portfolio. **
- Dollar cost averaging, in which smaller amounts of money are invested more frequently on a regular schedule, as opposed to investing your entire available investment dollars all at once. **
- Have a plan. This helps guide your investment moves, and minimizes making moves based on emotion.
- We believe it is better to try to opt for hitting consistent singles as opposed to hoping to hit an occasional home run.
*12/13/95 – 12/26/14
Diversification (Asset Allocation) does not does not guarantee a profit or protect against loss. Dollar Cost Averaging does not ensure a profit or protect against loss. An investor should consider his or her financial ability to continue to invest in a period of declining markets.