Market Timing - the ultimate 'buy low, sell high'

 

Market timing means trying to predict the future direction of the market. This is typically done through the use of technical indicators or economic data.

Many investors and academics, believe that it is impossible to time the market. Market timing is more of a gamble in their opinion than a valid investment strategy. Others, in particular active traders, disagree and believe fervently in market timing.

Whether successful, long-term market timing is possible is therefore a matter of opinion.
My personal view is that trying to 'time the market' is, for most investors, a mug's game.

What is beyond doubt is that it's almost impossible to be continuously successful at market timing over the long-term. For the average investor who doesn't have the time- nor indeed the inclination-to sit glued to a screen watching the market on a minute by minute basis, there are sound reasons to avoid market timing and instead to focus on investing for the long-term.

We'd all like to buy at the bottom and sell at the top, but that relies much more on luck than judgement. Market timers are the ultimate "buy low and sell high" traders. Day traders, who move in and out of positions in minutes or hours, are the extreme market timers. Every day they look for small profits on a number of stocks by trying to exploit swings in a share's price.

Most market timers operate on a longer time scale but can move in and out of a stock quickly if they think they see an opportunity to profit. They argue that it is possible to spot situations where the market has over or under valued a stock. They use a variety of tools to help them predict when a stock is ready to break out of a trading range.

However, share prices do not always move for the most easily predictable or logical of reasons. An unanticipated or random event can send a stock's price shooting up or down and no charts economic data are capable of predicting those movements.

The late 1990's internet stock market frenzy graphically demonstrates what happens when investors get swept up in the euphoria of the moment and, consciously or not, became market timers. Everyone had a hot tip about the next "big thing" and investors were rushing to buy stocks as they shot up. People left their secure jobs to make their fortunes as 'day traders'. Few, if any, succeeded, as most of these rockets that had risen so far and so fast, came crashing down to earth just as quickly.

The end result was the exact opposite of what they had anticipated. It turned out to be a case of "buying high and selling low" and you don't have to be a great investor to know that that's not the best strategy for making money.

For most investors, the much more reliable path to investment success is to invest in a range of well-managed funds that fit their requirements for income and growth.

Unfortunately, many if not most people buy funds, whether directly or via ISAs and fail to monitor their performance on a regular basis. This is a recipe for financial disaster. Keeping a close eye on the performance of your funds and crucially, switching into others if yours are consistently under-performing, is a far better way of making money than trying to time the market.

Moneyspider.com helps you by rating and valuing over 2,000 funds, updated daily, so you can be sure you're getting the essential information you need to make the most of your money.

 

Tony Ahearne, Director, Moneyspider Limited.
Tony has been an Independent Financial Advisor for over 30 years. (The above article is based on the author’s understanding of the new rules and investors are advised to take their own professional advice.)"Many of our members now check their funds on a daily basis."
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