Market timing 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®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published December 19, 2013.