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What is Market Timing?
Market timing is an investment approach in which the investor attempts to "time" or predict the direction of the market. In market timing, investors make their investments based on an expectation of the market moving in the direction required to make the profit expected, rather than on information about the stock or the company. Many investors think they can "time" the market, but in fact few are successful at it. A big part of the reason for this lack of success is that market timing investment is very subjective. Therefore, it is difficult to remove emotional issues from the investment decisions.
There are some common market timing axioms that do have some basis in reality. "Buy in November and sell in April" is perhaps the most common. It has been observed that stock prices frequently trend downwards during the summer months, and this axiom makes reference to that trend. Another market timing axiom is that stock prices trend upwards during years in which there are presidential elections and downwards in the years following a presidential election. There are many more market timing axioms, and while many have some basis in reality, they are also too vague for an investor to achieve consistent success by following their advice.
Most market timing investors use technical analysis to make their investment decisions. There are many different types of technical analysis tools available, the most popular being charting tools of various sorts. Market timing investors are of the opinion that investment behavior is predictable and that by looking at past patterns, future patterns can be profitably predicted.
This is the holy grail of the market timing investor, to make profits from the correct prediction of the market direction based on observations of past events. Much research effort has gone into models to reliably provide market timing data, but to date, there is little consensus as to their effectiveness. Most investment advisers still dismiss market timing as simply wishful thinking.
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![Market timers attempt to predict upward and downward trends in market pricing.]()
By: tang90246Market timers attempt to predict upward and downward trends in market pricing.
Discussion Comments
Sneakers41-I know that some people do not like that strategy, but it works for me. For example, with bond market timing you really have to look at the trends with the interest rates.
Bonds tend to have an inverse relationship with interest rates, so when interest rates go up bond prices go down and become cheaper.
For bonds it is best to layer bonds with various maturity dates so you can take advantage of a low and higher interest rate market.
The problem with trying to time the market is that you almost always sell in a panic and buy when the market has reached a frenzy and by then most of the gains have already been made.
It is best to invest in various sectors so that you don’t overexpose yourself to one area and get wiped out. I happen to love real estate and think now is a great time to buy.
SauteePan-I think that market timing risk is a guess. I feel more comfortable with dollar cost averaging because that way each month I make more investments and my portfolio will grow.
Sometimes the price will be lower so I will get more shares for my money and other times it will be higher. This will allow you to take advantage of the market. Investing in the stock market should be a long term strategy and market timing performance is hit or miss.
Suntan12- These market timing advisors generally watch a particular industry and follow the index for that industry.
For example, the price of gold is at record highs right now. Historical market data indicates that in times of economic uncertainty and when people have little faith in government; people start to invest in gold instead.
This is why the price of gold is so high. Speculators feel that buying gold is the best hedge against inflation which is what people are most concerned with when the dollar becomes devalued.
Devaluation of the dollar occurs with excessive government spending and our current deficit represents 36 cents for every dollar. This should give you some idea.
The investment strategy of market timing funds is different than dollar cost averaging. In market timing risk you are generally trying to find the bottom or top of the market.
While this seems logical it is very difficult to do that because no one knows when the bottom of a market is or when the top is.
Most market timing advisors take educated guesses based on research data on the actual sector.
Dollar cost averaging is just making the same dollar investment every month regardless of how the market has performed.
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