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All about Market Timing and Why it Doesn’t Work

  • Rudri Rawell
  • Jan 12 2022
  • 6 minutes
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Very often, the stock market goes haywire as it experiences volatility and people start panicking while discussing market timing. During a bull market, it’s easy to adopt the idea of buy-and-hold for the long term. However, when markets start fluctuating, it gets harder to walk the same path.

It’s all various forms of market timing. Trying to get out while it’s still relatively high and re-enters when it’s lower.

What is market timing?

Market timing is an investing strategy under which investors try to enter and exit the market to avoid losses as far as possible. For example, an individual who is trying to time the market will sell his/her position in the stock market if they feel that the market may crash. They would then wait for the downfall and buy stocks that are currently cheap. 

Market timing heavily uses the “buy low and sell high” technique. It is mostly an investor’s attempt to gain cushion from the blows of the stock market by predicting possible movements. These predictions are mostly made to sync their buying and selling.

Why market timing is appealing?

Any seasoned investor will know that there could be short-term volatility in the market. How the investment turns out in the short-term market movement should be inconsequential for those who are invested for the long term. While most investors would agree with this statement, very few investors follow the discipline to stick to their investment strategy during market volatilities.

Why doesn’t market timing work?

It is believed that traders and seasoned investors are often equipped with sufficient knowledge of the market to understand how it works and is better placed to predict its movements. But this may not always be true. The conclusion is not that they may lack knowledge or experience.

Predicting the market and timing of investments is often difficult for most because the investment market is volatile and it is impossible to predict its movement.

Even if one assumes in theory that market timing may work, how can someone predict a series of instances that are ‘unpredictable’. If an investor succeeds in doing so, it could be sheer luck or pure coincidence. However, no investor would be comfortable leaving their hard-earned money on pure luck. Many studies have often rejected the effectiveness of market timing. Critics also state that it is impossible to time the market effectively.

What is the alternative to market timing?

Instead of relying on market timing, investors can focus their energies on an investment strategy that is effective and practical. A robust investment strategy can help in many ways. Not only does it allow investors to manage their finances well, it also helps them in enhancing their earnings possibility. It helps in strengthening their risk appetite by allowing them to set up a strong and diverse portfolio. Investors who are looking for alternatives to market timing can use these full-proof investment strategies –

Start investing early

Individuals who begin investing at an early age can easily familiarise with the market. They can practice patience and adopt long-term strategies for effectively meeting their goals. Investors can also reduce their dependence on timing the market and inculcate healthy investment habits by starting their investment journeys early.

Use a financial plan

A robust financial plan is very important to formulate effective investment strategies. A financial management plan can help investors in managing their cash appropriately. Investors can also diversify their portfolios effectively. They can enhance cash-flow management skills and to further meet their financial goals comfortably. With a financial plan, an investor can reduce reliance on market timing for generating positive returns.

Adopt a systematic approach

Instead of using market timing, investors can adopt a systematic investment approach. Focusing on investment plans that are usually not affected by the market ups and downs can help in the long run. For example, an investor can invest in a long-term SIP that can be bought at a nominal principal amount. This kind of investment option requires regular investments and therefore eliminates the need for market timing. In the long run, it also lets investors derive profits during low market phases by way of rupee cost averaging and the power of compounding.

Diversify investments

Often, investors rely on timing the market due to the fear of suffering a loss resulting from volatility. Investors can avoid such fears by diversifying their portfolio using a balanced mix of assets that can generate higher returns and have a lower risk.

Set up goal-oriented portfolio

Investments can be used in establishing a goal-oriented portfolio. Investors should look for schemes and funds that can help in building a corpus such that they can meet their financial goals comfortably. Using goal-oriented investments, an investor can shift his focus towards important financial requirements. This way, they’ll be less concerned about market timing for any investment decision. 

For example, individuals who will attain retirement in the short run can adopt strategies to build a robust retirement corpus. Therefore, they can invest in funds that can help in establishing a retirement friendly investment portfolio. 

Conclusion

To conclude, it is fair to say that the idea of market timing is not effective and investors may incur substantial losses. Those who want to develop a healthy outlook towards investments must look away from market timing. 

FAQs

  1. What is the best mutual fund strategy?
    Investors who make positive returns from mutual funds often focus on funds that have lower expense ratios, such as passively managed funds. Maximising rupee cost averaging and investing in aggressive funds can also help in achieving long-term gains.
  1. How do beginners invest in mutual funds?
    Beginners can download the Finity app on their smartphones to begin investing in mutual funds. The app allows investors to choose from a wide range of mutual fund options while ensuring a seamless investment process with minimum paperwork.
  1. What are the 3 major types of investment styles?
    Investment styles can be broadly categorised into three dimensions, namely active or passive investing, growth or value investing, and small cap or large cap investing.
  1. Is it better to invest in shares or mutual funds?
    Mutual funds allow portfolio diversification within the same investment amount versus shares, which are concentrated investment forms. Since mutual funds are managed by professional fund managers, new investors can benefit from lower risk as compared to shares, which directly exposes investors to market risks.
  1. What should be your investment strategy?
    An investment strategy that allows sufficient portfolio diversification while minimising the risk involved and maximising returns in the long run can be an ideal for investors.
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