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Focus on Time in the Market, Not Market Timing

Key Points

» What Is Market Timing?
» Market Timing Has Its Risks
» The Risk of Missing Out
» Use Time to Your Advantage
» Total Annual Return of the S&P 500
» Regular Evaluations Are Necessary
» Time Is Your Ally
» Points to remember

Sports commentators 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. It’s true that market timing
sometimes can be beneficial for seasoned investing experts (or for
those with a lucky rabbit’s foot); however, for those who do
not wish to subject their money to such a potentially risky
strategy, time — not timing — could be the best

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.
Relying heavily on forecasts and market analysis, market timing is
often utilized by brokers, financial analysts, and mutual fund
portfolio managers to attempt to reap the greatest rewards for
their clients.

Proponents of market timing say that successfully forecasting the
ebbs and flows of the market can result in higher returns than
other strategies. Their specific tactics for pursuing success can
range from what some have termed “pure timers” to “dynamic asset

Pure timing requires the investor to determine when to move 100% in
or 100% out of one of the three asset classes — stocks, bonds,
and money markets. Investment in a money market fund is neither
insured nor guaranteed by the U.S. government, and there can be no
guarantee that the fund will maintain a stable $1 share price. The
fund’s yield will vary. Perhaps the riskiest of market timing
strategies, pure timing also calls for nearly 100% accurate
forecasting, something nobody can claim.

On the other hand, dynamic asset allocators shift their
portfolio’s weights (or redistribute their assets among the
various classes) based on expected market movements and the
probability of return vs. risk on each asset class. Professional
mutual fund managers who manage asset allocation funds often use
this strategy in attempting to meet their funds’

Market Timing Has Its Risks 

Although professionals may be able to use market timing to reap
rewards, one of the biggest risks of this strategy is potentially
missing the market’s best-performing cycles. This means that
an investor, believing the market would go down, removes his
investment dollars and places them in more conservative
investments. While the money is out of stocks, the market instead
enjoys its best-performing month(s). The investor has, therefore,
incorrectly timed the market and missed those top months. Perhaps
the best move for most individual investors — 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.

As seen in the accompanying table, purchasing investments and then
withstanding the market’s ups and downs can work to your
advantage. Though past performance cannot guarantee future results,
missing the top 20 months in the 30-year period ended December 31,
2008, would have cost you $19,010 in potential earnings on a $1,000
investment in Standard & Poor’s Composite Index of 500

Stocks (S&P 500). Similarly, a $1,000 investment made at the
beginning of 1989 and left untouched through 2008 would have grown
to $5,046; missing only the top 20 months in that span would have
cut your accumulated wealth to $2,161.1

Though many debate the success of market timing vs. a buy-and-hold
strategy, forecasting the market undoubtedly requires the kind of
expertise that portfolio managers use on a daily basis. Individual
investors might best leave market timing to the experts — and
focus instead on their personal financial goals.

The Risk of Missing
1979-2008 1989-2008 1999-2008
[1] Untouched $22,898 $5,046 $870
[2] Miss 10 Top-Performing Months 8,246 2,161 434
[3] Miss 20 Top-Performing Months 3,888 1,130 279
Perhaps the most significant risk of market timing
is missing out on the market’s best-performing cycles. Columns
A, B, and C represent the growth of a $1,000 investment beginning
in 1979, 1989, and 1999, and ending December 31, 2008.

Row 1 shows the investment if left untouched for the entire
period shown above; Row 2 shows the investment if it was pulled out
during the 10 top-performing months; and Row 3 shows the investment
if it was pulled out during the 20 top-performing months.

Use Time to Your Advantage 

If you’re not a professional money manager, your best bet is
probably 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.

Total Annual Return of the S&P
Source: Standard & Poor’s.
Based on the total annual returns of the S&P 500.

Regular Evaluations Are Necessary 

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. Most experts say annual
reviews are enough to ensure that the investments you select will
keep you on track to meeting your goals.

Normally a young investor will probably begin investing for
longer-term goals such as marriage, buying a house, and even
retirement. The majority of his portfolio will likely be in stocks
and stock funds, as history shows they have offered the best
potential for growth over time, even though they have also
experienced the widest short-term fluctuations. As the investor
ages and gets closer to each goal, he or she will want to rebalance
portfolio assets as financial needs warrant.

This hypothetical investor knows that how much time is available
plays an important role when determining asset choice. Most experts
agree that a portfolio made up primarily of the “riskier” stock
funds (e.g., growth, small-cap) may be best for those saving for
goals more than five years away; growth and income funds and bond
funds might be the main focus for investors nearing retirement or
saving for shorter-term goals; and investors who see a possible
need for cash in the near future might consider a portfolio
weighted toward money market instruments.2 Remember,
though, that even those enjoying retirement should consider the
historical inflation-beating benefits of stocks and stock mutual
funds, as people often live 20 years or more beyond their last
official paycheck.

Time Is Your Ally 

Clearly, time can be a better ally than timing. The best 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.

Points to Remember 

  1. Historically, a buy-and-hold strategy has resulted in
    significantly higher gains over the long run, although past
    performance is not indicative of future results.
  2. A big risk of market timing is missing out on the
    best-performing market cycles.
  3. Missing even a few months can substantially affect portfolio
  4. Market timing strategies — which range from putting 100%
    of your assets in or out of one asset class to allocation among a
    variety of assets — are based on market performance
  5. Market timing is best left to professional money managers.
  6. Though buy-and-hold is a smart strategy, regular portfolio
    checkups are necessary.
  7. Time horizon is particularly important when determining asset
  8. Riskier investments are more appropriate for longer-term goals,
    and as goals get closer, portfolios should be rebalanced.
  9. Even in retirement, portfolios should contain investments for
    earnings to keep pace with inflation.
  10. You should consult your financial advisor when making asset
    allocation decisions.

1Source: Standard & Poor’s. Stocks are
represented by Standard & Poor’s Composite Index of 500
Stocks, an unmanaged index generally considered representative of
the U.S. stock market. Individuals cannot invest in indexes. Past
performance is not a guarantee of future results.

2An investment in a money market fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. Although the fund seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose
money by investing in the fund.

© 2010 Standard & Poor’s Financial Communications. All
rights reserved.