What is Market Timing Strategy and What are the Risks Involved?
Most of us would have heard about the market timing strategy in the share market. Essentially an investing strategy, market timing aims at predicting the best times for the investor to enter the market and leave it.It would depend heavily on market analysis and forecasts, and is often the key factor utilized by mutual fund managers, share market traders, brokers and financial analysts. These individuals usually use the market timing strategy to help their clients make the most of their investments and reap great rewards in return.
Market timing has its supporters in the form of those who claim that perfecting the strategy would enable an investor to forecast the highs and lows of the share market successfully, thereby enabling him/her to get higher returns in the process when compared to other strategies.However, critics oppose this claim, stating that time marketing has some serious risks one would need to consider before stepping into it. Accordingly, here are some of the risks commonly associated with time marketing.
Correct Prediction of Market Cycles
It is understandable that share markets usually move in cycles with various indicators that help throw light on the market phase at any given time. But this would not mean that these cycles would continue to remain the same at all times. As such, even highly experienced individuals would find it hard to predict accurately as to when to get in and out.
Missed Exceptional Return Periods
The inability to correctly predict the market phase can in turn lead to the next major risk of market timing, missing the best performing cycles of the market and therefore, missing out on the periods of exceptional returns. Individuals who find it hard to gauge the market volatility correctly can end up exiting it just when the market peaks, thereby losing out on gaining attractive returns.
Let’s take a basic example to understand better. Consider the scenario wherein an investor has invested a significant amount of money in the market. He/she predicts the market would go down in the next couple of days and so, removes all the money from the market in order to place them in conservative holdings.
However, the market enjoys a sudden spike and continues to experience its best performing cycle ever. The investor therefore, loses out on the chance to cash in on this spike and ends up missing the period entirely.
All these risks go to prove that the market timing strategy is best left to the professionals with the necessary expertise and experience while individual investors focus more on attaining personal goals instead. A suitable alternative would be to opt for the ‘dollar cost averaging’ aka ‘buy and hold’ strategy wherein an individual investor would purchase shares continually and keep them intact throughout the market cycle. This would in turn enable the investor to gain favorable returns while losing less money in the process.