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Timing Mutual Funds in the Market

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Timing Mutual Funds in the Market

A timing service is an investment advisory company that uses market timing to switch its investments among mutual funds. It tries to make money whether the stock market goes up or down. When there is no clear trend in the stock market, the timing service places your money in a low-volatility investment such as a money market account.

Things To Know

  • Many mutual funds use timing services to time the market.
  • Timing services use tactical and dynamic asset allocation to increase returns and reduce risk.

How timing services work

Timing services use tactical asset allocation and dynamic asset allocation in an attempt to increase returns and reduce risk. Dynamic asset allocation sets the long-term allocations of a portfolio. Tactical asset allocation makes short-term portfolio changes that support the goals of the long-term dynamic allocation.

More about dynamic asset allocation

When an investor uses dynamic asset allocation, he or she chooses investments from categories with the best potential for high returns under the current market conditions. When market conditions change, so will the asset allocation called for. Assets are moved among funds or asset classes based on changing timing signals. Dynamic allocation changes are infrequent and are based on long-term expected returns and risk estimates. For example, if Treasury bonds have been increasing their returns steadily over the past several years, more Treasury bonds may eventually be added to a portfolio.

More about tactical asset allocation

Tactical asset allocation tries to maintain value by reallocating investments when market conditions change more than expected on a daily or monthly basis. It adjusts the risk and return of the long-term dynamic strategy in response to short-term market changes. For example, if the Treasury bonds added in the dynamic allocation take a below-normal dip one month, funds may be taken out of the bonds and placed somewhere else. If the bonds return to the expected growth rates necessary to support the dynamic allocation, funds are then reinvested into the bonds. When these tactical short-term allocations match the long-term strategy, no further changes are made.

Market timing a mutual fund may reduce its overall volatility. However, some mutual funds limit market timing switches because they believe these hurt a portfolio manager’s ability to effectively manage the fund.