Sports pundits often predict the big winners at the start of a season, only to see their forecasts fade away as their chosen teams lose. Similarly, market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. While it is true that seasoned financial professionals can sometimes use market timing to their client's advantage, for those investors who do not wish to subject their money to such a potentially risky strategy, time ' not timing ' could be the best alternative.
What Is Market Timing?
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. One of the biggest risks of this strategy is potentially missing out on the market's best-performing cycles. For instance, say that an investor, believing the market will go down, takes his or her money out of stocks and places it in more conservative investments. However, while the money is sitting on the sidelines, the market enjoys its best-performing month(s). In this case, the investor has incorrectly timed the market and missed those top months. Perhaps the best move for most individual investor's especially those striving toward long-term goals might be to purchase shares and hold on to them throughout market cycles. This is commonly known as a 'buy-and-hold' investment strategy.
History indicates that purchasing investments and then holding on through the market's ups and downs can potentially work to your advantage. For example, a hypothetical $10,000 invested in the Russell 3000 Index, an unmanaged index that cannot be invested into directly and which measures the performance of the 3,000 largest U.S. companies, in December 1994 and held for 10 years, would have risen to $26,329.71 ' or a cumulative price gain of about 163% ' by December 31, 2004. If the investment was cashed out two years earlier at year-end 2002, it would be worth only $18,580.70. Impatience would have cost more than $7,700 or almost half of the total price appreciation over the 10-year period, although past performance cannot guarantee future results.
If you're not a professional money manager, your best bet may be 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. Compounding can also help lower risk over time: as your investment grows, the chance of losing the original principal declines.
Buy and hold, however, doesn't mean ignoring your investments. Remember to give your portfolio regular checkups, as your investment needs will change over time. For instance, a young person who begins investing for long-term goals, such as paying for his children's college education or even his own retirement, will likely allocate a large portion of his portfolio to stocks. Even though they have the potential for loss and short-term volatility, history shows that investing in stocks offers the potential for long-term growth. Yet as the investor ages and gets closer to each goal, he or she will want to rebalance portfolio assets as financial needs warrant. Many experts say annual portfolio reviews are an essential step for helping to keep you on track to meeting your goals.
Time Is Your Ally
Clearly, time can be a better ally than timing. The prudent approach to your portfolio is to arm yourself with all the necessary information, and then take your questions to a financial advisor to help with the final decision making. Above all, remember that both your long- and short-term investment decisions 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.