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Fund Selection vs. Market
Timing
Market Timing verses Fund Switching, what's the difference?
Need to reduce your risk exposure. Doesn't everyone! Put the odds in your favor... invest with
the trend.
Conservative trend following, Market Timing or Dynamic Allocation is an investment strategy with the primary goal of investing in the
markets when the upward trend is strong and to be out of the market,
in the safety of a money market account, when the market trend is weak.
In other words don't fight the trend. Liken it to the breaks on your car. It is not always prudent to go full throttle, especially when the light ahead of you is clearly red.
Market Timing is designed to reduce investor risk, anxiety, and overall volatility
while increasing liquidity and portfolio returns. The adversaries of
Market Timing declare that because some of the biggest market days come
just after the end of a market decline, the Market Timing strategy will
most likely miss out on these biggest up days. However, studies have
shown that that even if all of these days are missed, which is unlikely,
the overall investor return still benefits more by missing the bulk of the worst
days.
Fund Switching is a little fancier. It is an
investment strategy where by the mutual fund investor monitors the different
market areas or sectors in an attempt to be in the strongest funds of
the market or sector at any given time. In theory, the Fund Switching
investor would always be 100% invested at all times. While this risk
exposure is the same as the buy-and-hold investor's, the overall risk
is considered less by allowing exposure to only the strongest market
areas and eliminating the weakest. Liken this to switching lanes in your car on the highway. Your can look ahead to see where the traffic is flowing and "switch" to the most promising lane.
It is said that the biggest component of investment success, 70% to
85%, is dependent on the direction of the overall market. Market
Timing works to maximize this area; buy-and-hold and asset allocation
ignore it. The investment community states that over 85% of mutual
fund mangers fail to beat the S&P 500 on a regular basis; so, they
suggest buying S&P 500 index funds. What they fail to disclose
is that while holding the S&P 500 the investor may have times where
as much as 50% to 60% of their account value may be lost. Also
around 80% of the stocks within the S&P 500 fail to beat the index
itself. Like so many other areas of life, the majority of the
work is done by 20% of the workforce. If an investor wants to beat the
S&P 500, when the markets are strong, they need to invest in the
strongest areas of the S&P. Fund Switching is designed to seek out
the stronger areas to enhance portfolio growth.
Market Timing and Fund Switching investment strategies are the polar
opposites of the buy-and-hold, asset allocation schemes Wall Street
pushes on individual investors. The idea of avoiding weak markets
but being in the strongest areas of strong markets seems like common
sense; yet, Wall Street continues to avoid the responsibility they
have requested.
While both Market Timing and Funds Switching have their advantages,
together they make an investment formula that yields superior returns
and safety.
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