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Timing the Market

- Alan Lavine and Gail Liberman

Many investors who speculate on stocks or common stock funds use market timing systems that track price and economic trends to get in and out of the market.

Experts say market timing can work well when you invest in sector funds, precious metals funds and bear market funds that perform well when stock prices drop.

But Pat Dorsey, author of "The Five Rules for Successful Stock Investing (Wiley)," cites a study published in the Financial Analyst Journal that shows beating the market is difficult.

The researchers of the study compared the difference between buying and holding stocks with market timing tactics from 1926 through 1999. Numerous methods of market timing were used. Every month, a decision was make to be in stocks or U.S. Treasury bills.

The results showed that about one-third of all possible market timing tactics outperformed the market. But there were thousands of market timing strategies that were used in the study. So, your chances of using the right system are slim.

Dorsey, who is director of stock analysis at Morningstar Inc., Chicago, says the one-third success rate isn't good enough. Reasons:

  • Buy-and-hold investing benefits from the compounding of the rate of return on the investment.

  • The performance of the stock market typically is determined by a relatively few days each year. So you risk being out of the market when the good days come if you use market timing.

  • None of the mutual funds tracked by Morningstar over the past 20 years has consistently timed the market.

    Other analysts, however, say market timing is valuable because it can get you out of potentially bad stock markets. Paul Merriman, president of the Merriman Group of Funds Seattle, says market timing is asset protection. His market timing mutual funds were in the black during the bear market of 2000, 2001 and 2002.

    "When the market is going down, you don't know how far it is going to drop," he says. "So it's better to protect yourself and get out when the trends are heading south."


    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

    To read more columns, please visit the column archive.

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