When investing in bonds, stocks, or mutual funds, investors can increase their rate of return by timing the market by buying when stock markets go up and selling before they go down. To increase his or her rate of return, a good investor can either pick a good investment or pick a good time to invest in the market. But trying to time the market to get a higher rate of return comes with more risk. Investors who try to time the market should know that sometimes things go wrong and they could lose money or miss out on a great return.
It's hard to time the market. To be successful with your investments, you need to make two good choices: one to sell and one to buy. If you get either wrong, you're out of luck in the short term. Also, investors should be aware of the following:
- Stock markets tend to go up more than down.
- When stock markets go down, it usually happens very quickly. That is, losses in the short term hurt more than gains in the short term.
The stock market makes most of its money in a very short amount of time. If you miss just one or two good days on the stock market, you will miss out on most of the gains.
Not many investors are good at knowing when to buy or sell. In "The Portable Pension Fiduciary," written by John H. Ilkiw, the results of a thorough study of institutional investors like managers of mutual funds and pension funds were mentioned. The study's main finding was that the average money manager added some value by choosing investments that did better than the market. The best money managers made more than 2% per year by picking the right stocks. But the average money manager lost money because they tried to time the market. So, investors should know that the timing of marketing can add value, but there are better ways to make more money in the long run with less risk and a higher chance of success.
One of the reasons why it's hard to pick the right time to invest is that it's hard to keep your emotions out of it. When people invest based on how they feel, they tend to act too quickly: they buy when prices are high and sell when prices are low. Professional money managers who can make investment decisions without letting their emotions get in the way can add value by choosing the right time to invest. However, the majority of their higher rates of return still come from choosing the right investments and using other strategies. A good Tactical Asset Allocation fund is a good choice for investors who want to boost their rate of return by timing the market. These funds try to add value by changing the mix of cash, bonds, and stocks they invest in based on strict rules and models, not on how they feel at the time.
