Market timing has become one of the most discussed topics among investors these days. With a significant amount of fluctuation in the key stock indices and their attempts to break above their highs, investors are asking if we are standing near a top in key stock indices or if we are going much higher.
At the very core, market timing is essentially trying to predict the top or bottom of a market to act accordingly—those investors who follow this strategy tend to believe in the buy-low/sell-high way of investing.
With this said, investors must keep a focus on the long term, because market timing can go wrong. To look at how wrong it can be at times, we don’t really have to go far. Just look at what happened in 2008 and 2009—a classic example of when market timers may have faced some severe losses.
Consider the chart of the S&P 500 below.
Chart courtesy of www.StockCharts.com
In the summer of 2008, the S&P 500 started to decline, but the sell-off didn’t really start till October. By mid-October, the S&P 500 was around the 750-point level. For those who remember, it wasn’t a great time to say the least.
If market timers thought that the S&P 500 had bottomed, then they were in for a long misery, because the bottom didn’t really occur until March of 2009—when the S&P 500 declined to below the 670-point level.
With market timing, what holds true is that rewards can be huge. Just look back at the chart of the S&P 500 above; the index traded below 670, and it is now trading around … Read More