Welcome to Beat The Dow

Can You Afford Not to Time the Market ?

To time the market (i.e., by alternating periods of aggressive investment with periods of conservative investment), or else to buy and hold the market (i.e., buy and hope), that is the question.

The answer depends on your age, the size of your nest egg, and your tolerance for risk. The closer to retirement you are, the larger your nest egg, and the lower your tolerance for risk, the more critical it is for you to exercise some risk management discipline. Otherwise, you may suffer a financial disaster from which you'll never recover. A buy-and-hold investor buying the S & P 500 Stock Index in January 1973 would have lost 48% of his investment in 21 months. It would have taken 7.5 years to recoup this loss, or 12 years considering the effects of inflation.

"Buy and hold strategies were designed for institutions, not retirees. Retirees don't have infinite lives," says David Lucca, President of the Society of Asset Allocators and Market Timers, in a interview with Investment News.

If buy-and-hold investors rigorously practiced their philosophy, they would recoup their losses--eventually. But studies have found that investors tend to bail out after extensive price declines and to buy back in only after extensive advances have occurred. Thus, real-life investors suffer from buy-high-sell-low syndrome.

Since 1933, there have been 13 bear markets, or one every 5 to 6 years, when bear markets are defined as corrections of 20% or more in the S & P 500 Stock Index. The average decline suffered in these bear markets has been 33% and they have ranged from 3 months to 41 months in duration, averaging 16 months.

Market timing is a legitimate strategy for reducing risk. It's not perfect--but neither is any other strategy. During raging bull markets, timing strategies tend to underperform buy-and-hold. During bear markets, they tend to overtake buy-and-hold approaches. Timing strategies--over the long haul--tend to deliver about the same or slightly better gains than buy-and-hold, but with markedly reduced risk. Please see the companion article entitled Using Market Timing Signals with an Index.