The Case for Market Timing
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live with dignity and fulfill their moral obligations towards charitable activities)
In the world of investments, the topic of market timing is often discussed. What is market timing? Does it have any validity as an investment approach? Should you consider it in your investment plans? In exploring this idea, bear in mind that know system or approach will work perfectly all the time. Also that market timing as a strategy is best left to the more knowledgeable investor or professional money manager.
As old as the stock market is, investors have tried to develop ways to avoid down markets and benefit from market up trends. A strategy that tries to do this is known as market timing. It involves moving in and out of the market in response to indicators, typically based on mathematical models. The idea is to try to identify market trends and changes in trends.
The concept of market timing is founded upon research studies that have indicated market events are not random; that relationships do exist between different data and the behavior of the financial markets. Today, with computer technology and sophisticated systems, market timing has gained in popularity as an alternative equity strategy.
The primary focus of market timing is to avoid major market downturns. If an investor can successfully avoid some or all the weaker periods in the market and participate in the market and participate in the market up trends, they can obtain a superior return to a buy/hold strategy.
Looking at history, some interesting facts have been published. From 1980-1989, if you missed the best ten days of the market, your return would have decreased from 17.6% to 12.7% based on the S&P 500 Index. However, by missing the worst ten days, your return would have increased to 26.6%. If you missed the best and the worst 10 days your return would have been 21.1%, which was 20% better than a buy/hold strategy for that period.
Remember, the goal of market timing is to reduce the risk of investing in the stock market. It is also to try to achieve a higher return than investments with similar risk.
Many investors choose to avoid the better performance that the stock market can provide volatility of the market and/or do not have the patience to be, truly, a long-term investor.
For these investors, market timing can prove to be a worthwhile approach with the goal of reducing risk and increasing risk-adjusted returns.
Market timing, in my humble opinion is a mistake. I believe that the best way to make money in the market is long term investing, with a minimum of ten years, twenty years being better. Good companies and sufficient time will bring superior results.
Let me share my personal long-term investing facts. I bought Dreyfus Leverage Fund in 1961, and invested $1250. The fund has changed names and managers several times,however I still have holdings in the fund. Try and guess how much it is worth today….
We will continue to explore this concept in further columns.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)