Market Timing vs Buy-and-Hold

Another investment management tool that you may hear about is market timing—the attempt to purchase investments when their market value is down, and sell them when their market value is up. Sounds logical—after all, the basic principle of successful investing is “buy low, sell high.”

But what sounds simple is very difficult to achieve. Investors who attempt to time the market typically are unable to time their moves accurately. As a result, they either lose out on potential gains by selling too early, or pay too high a price for a security by buying too late.

MMBB recommends that our members take a long-term approach to investing. That’s what we do. We set financial goals. We develop a strategy to meet those goals that fits within our comfort level for risk. We implement that strategy. We regularly evaluate the results to see if our strategy is working. And, we adjust the way we implement the strategy when needed.

On an annual basis, we recommend that you rebalance your portfolio. This means bringing your portfolio back to your original asset allocation mix. Rebalancing ensures that your portfolio does not inadvertently overemphasize one or more asset cateogires-—and you return your portfolio to the level of risk with which you are comfortable.

To rebalance your portfolio we recommend an approach called dollar cost averaging. Dollar cost averaging involves systematically buying and/or selling at different prices at regular intervals. This tends to smooth out the peaks and valleys of the market for you. Your investments buy more shares when the market is down, and fewer when the market is up. Over time, your average cost is lower than the average price you paid for your shares.

Although PICs allow you great flexibility and control, most financial experts caution against changing your investments for the wrong reason and at the wrong time. Remember that past performance is no guarantee of future results—last month’s hot investment may cool off this month. Often the smartest thing to do is to choose a strategy that you are comfortable with and then stick to it until your investment objectives or risk tolerance change.