Market timing is a short-term investment strategy, where an investor tries to make a profit through making trading decisions and predicting market movements accordingly. These decisions and predictions are usually made based on technical analysis, economic conditions, data as well as prices of individual commodities.
In addition, market timing can be defined as a temporary tactic, where a trader aims to capitalize on the inefficiencies or differences of the daily closing price of a stock. Even though this is legal, most funds limit the number of times a person can enter and leave a fund within a particular time and that is the reason why many people do not like it.
Because of the fact that the future direction of the stock market cannot or it can be hardly predicted, those who attempt to time the market, particularly those investing in a mutual fund, have a hard time in persuading investors to remain interested in market timing.
Market timing in the long run
Some investors strongly believe in market timing while others think that it is tough to time the market. Therefore, whether it is possible to time the market or not is relative. Nevertheless, the fact remains that it is difficult for an investor to do market timing consistently in the long run. Those investors who do not have the time or lack the desire to monitor the market every day tend to focus on making long-term investments and avoid market timing.
Generally, the constant analysis related to market timing encompasses more trading and more asset relocation activities than the passive management. In addition, it requires more education and time than passive management. Furthermore, the capital gain taxes and additional trading requirements may lead to higher return requirements and higher management fees.
Investors making long-term investments view market timing as a controversial idea. This is because research has revealed that many investors cannot consistently find the market’s ‘tops’ and ‘bottoms’. Regardless of this, many investors really like timing the market, and many of those have already posted returns that have exceeded the market benchmarks. However, the big challenge here is delivering returns that are above average.