Market Timing vs Buy and Hold
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Market Timing vs Buy and Hold
Market timers actively buy and sell securities because they believe certain securities or markets are overvalued or undervalued. There are several potential advantages to market timing. First, it provides the structure for an investment strategy and can reduce risk in a given asset class. Second, it can protect investments in down markets by pulling funds out of the market and placing them in risk-free, interest-bearing accounts.
Things To Know
- Market timing can reduce risk.
- Market timing rarely outperforms the market.
Consider the cons
But there are several drawbacks to market timing as well. Timing methods that do not work as intended can be costly. Furthermore, the best strategies underperform the market. Market timing can be appropriate for reducing volatility, but it does little for outperforming the market.
There is an alternative to market timing
The alternative to market timing is the buy and hold strategy. When you buy and hold, you select a balance of assets for your portfolio, buy them, and then hold onto them for the long term. You do not actively change your asset allocation. This is not to say, however, that you do not regularly rebalance your portfolio to maintain a certain mix of investments. As soon as you start selling to cut your losses, you are using market timing, which may result in selling under-performing investments or purchasing investments that are undervalued.
Why buy and hold?
The advantages to buy and hold are the ease of managing your portfolio and the greater tax efficiency. Disadvantages include the possibility of substantial losses over the short term, and possibly over the intermediate term, as the result of higher portfolio volatility. However, buy and hold investors hope that if they hold their volatile investments long enough, long-term growth trends will overcome any short-term market losses; and in the stock market, at least, time has proven them right.
So will it be market timing or buy and hold for you? The answer may depend on the length of your investment time horizon, and whether you can invest the time and know-how to successfully time the market—or pay someone else to do it for you.
