Buy-and-Hold vs 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. Market timing is often used by brokers, financial analysts, and mutual fund portfolio managers who rely upon forecasts, market analysis, and their predictive talents to guess the optimal time to buy and sell. Market timing strategies range from putting 100% of assets in or out of one asset class to allocating among a variety of assets based on market performance expectations.

A big risk of market timing is missing out on the best-performing market cycles; missing even a few months can substantially affect portfolio earnings. Moreover, guessing the market’s timing is not easy, and even professional money managers, on average, have not been able to beat the overall stock market (as represented by the S&P 500 index).

For individual investors, a better alternative over the long run may be a buy-and-hold strategy. But a buy-and-hold strategy should still include regular portfolio checkups and balancing as necessary. Time horizon is particularly important when determining asset choices, with riskier investments generally better suited for longer-term goals. A financial advisor can help you determine an asset allocation suitable to your goals.

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 alternative.

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.

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 earnings.
  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 expectations.
  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 choices.
  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.
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