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WHAT IS MARKET TIMING?
May 03,2007 00:00
by
admin
WHAT IS MARKET TIMING? Market timing can be defined as making investment buy and sell decisions using a mechanical trading strategy which employs one or more indicators and/or proven strategies. The objective of a successful market-timing system is to be invested in the market during up trends and to be either in cash (or in a short position) during down trends, especially during brutal bear markets. Market timing can be applied to all types of investments including stocks, stock and index options, mutual funds, bonds, and futures. This book therefore focuses exclusively on using timing with index funds, sector funds, leveraged funds, and exchange-traded funds. It is your choice as to which of these investments you prefer to work with because the timing principles remain the same for each of them. Market timing is aimed at taking your emotions out of the investing equation—or at least minimizing their impact. This objective is critical to your success. Investor psychology has been studied for years, and the “herd instinct” is rampant. This urge to follow the herd plays right into your hands, because the crowd (whether individual investors or investment advisors) is characteristically wrong at major stock market tops and bottoms. This situation will always be with us, because the emotions of dealing with investing—fear and greed—will never change. Market timing is not a perfect investing approach; there is no such thing. Market timing cannot predict when the market will change direction. But, if you use a reliable market-timing system and follow its signals, then you will exit the market when it begins to turn down and you will re-enter the market when it begins to turn up, all in time to maximize and protect most of your profits. A study of the performance of professional market timers by MoniResearch Newsletter, an independent monitoring service, found that 92 percent of the 25 timers it followed outperformed the market averages in 1987 when the DJIA dropped by 23 percent on Black October, and 96 percent did so during the declines in January 1990 and August 1992. And in the latest time period for the year ending in September, 2002, 88 percent of classic market timers monitored beat the S&P 500 Index. Over the last five years ending on the same date, 63 percent beat the buy-and-hold strategy. And for those Nasdaq timers competing against the Nasdaq Composite Index benchmark, the numbers were even better, with 79 percent beating that index over five years, and 84 percent over the one-year time frame. These results are confirmed by Timer Digest publisher, Jim Schmidt, who found that 65 percent of the 100 market-timing newsletter services that he tracks beat the S&P 500 benchmark in 2000, 45 percent beat it in 2001, and 80 percent beat it in 2002. That’s precisely what market timing is all about—reducing losses when a bear market strikes |