Is Stock Market-Timing Better Than Buy-And-Hold Investing?
by: Dr. Sanjoy Ghose
Financial planners, brokerage firms and mutual fund companies maintain that individuals should buy and hold their investments forever, till they retire. This "buy and hold" philosophy has been disastrous for millions of investors, who remained fully-invested through the vicious bear market that started in 2000, and have seen their portfolios decimated. Those who bought and held their investments since the late 90’s have not yet seen their portfolios go back to levels of 8 years ago.
Market timing is the opposite of buy and hold, and uses "market timing indicators" or "tracking signals" to determine when to buy or sell mutual funds. To work, the system must be followed mechanically and rigorously, thereby removing investor emotion from the decision making process. A buy signal indicates that conditions are favorable for future increases in the market, and funds should be bought. A sell indicates that conditions are unfavorable, funds are to be sold and the cash proceeds held on the sidelines awaiting another buying opportunity.
Conventional stock market wisdom is that market-timing does not work, and that buy-and-hold is the only way for the small investor to succeed. But this is a false premise, perpetuated by the large brokerage houses and mutual fund companies who benefit the most from money that is left perpetually invested. Even occasional trading by a large number of individuals dramatically increases fund expenses. Funds must keep more cash on hand to handle withdrawals. Both these factors reduce the annual fund return and hence the profits of the mutual fund companies.
A whole series of advertising programs have therefore been aimed at convincing people that one should always be fully invested, and even infrequent liquidation of fund shares is foolish. They contend that your money must be invested at all times, in order to benefit from those few days when the market goes up. And since one cannot know when these days will be, they want you to stay invested no matter what the market is doing. It should be no surprise then that these companies are not inclined to show statistics about how much the investor would gain by being out of the market on those few days when the market goes down.
The trick of knowing when to pull your money in and out of the market is what market-timing is all about. And in case you are skeptical that it can’t be done, there is enough history, now, to show that the performance of successful market-timing schemes can be pretty spectacular.
For instance, this author’s long-term market-timing system, at www.PredictableInvesting.com signaled a SELL in October 2000. At this time all mutual funds were sold and the cash safely tucked away in money market funds. After riding out a rough market, thereby preserving capital when every one else was losing, a BUY signal was issued on June 30, 2003. At this time the money was reinvested back into the market. This portfolio has grown to more than 4 times in a little over 11 years Details can be found at http://www.PredictableInvesting.com/Portfolio.html; it shows how the market-timing technique trounces the buy-and-hold philosophy by generating 81% more profit.
About The Author:
Dr. Sanjoy Ghose spent his 40 year career in technology research and development of computer storage devices. He was a senior executive at several well known California Silicon Valley companies and startups. Since his retirement from high-tech, he has been publishing his FREE newsletter on investing, a subject he has studied and followed extensively for over 16 years. To find out more, please visit www.PredictableInvesting.com.
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August 2006
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