This is the final installment of our series on investment strategy. This week’s article is about market timing, which is essentially the opposite of dollar-cost averaging.
Pros who believe they can put their money into the market at “optimal” times monitor trends and other financial criteria. They believe that markets follow predictable patterns and that market timers can select stocks before they shoot up. One problem with this strategy is that even when a person has wisely chosen a sector or correctly analyzed a cyclical pattern, the specific stock chosen may not conform to expectations. Also, the market timer can never know with certainty when there’s a bargain since the prices might drop even further after he buys. Many academic studies have demonstrated that market timers underperform the market as a whole.
Market timing is a time-consuming investment strategy. If market timers simply bought a diversified fund, they could spend all day on other activities rather than watching the market, and statistically, they’ll actually come out ahead. As onlookers of this strategy observe, jumping in and out may not make you money; it may only make you tired, and lose cash in trading fees.
Day traders
Investors referred to as “day traders” are, by and large, not investment pros, and often buy and sell based on their hunches, hot tips from the internet, and their willingness to take a chance. They win some, lose some, but in the end, there are far more losers than winners.
If you are considering following the market timing approach, first consult with a financial advisor to find out if the risks involved in following this strategy would really help you to advance your goals.
Douglas Goldstein, CFP®, investment advisor, is the co-author with Grandmaster Susan Polgar of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing.
Douglas Goldstein, CFP®, GFP®, is the director of Profile Investment Services, Ltd. www.profile-financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates give tax or legal advice.
Published November 12, 2014.