what is market timing 
market timing is the act of moving investment money in or out of a financial market or switching funds between asset classes based on predictive methods if investors can predict when the market will go up and down they can make trades to turn that market move into a profit timing the market is often a key component of actively managed investment strategies and is almost always a basic strategy for traders predictive methods for guiding market timing decisions may include fundamental technical quantitative or economic data many investors academics and financial professionals believe it is impossible to time the market other investors particularly active traders believe strongly in market timing whether successful market timing is possible is a matter for debate though nearly all market professionals agree that doing so for any substantial length of time is a difficult task understanding market timingmarket timing is not impossible to do short term trading strategies have been successful for professional day traders portfolio managers and full time investors who use chart analysis economic forecasts and even gut feelings to decide the optimal times to buy and sell securities however few investors have been able to predict market shifts with such consistency that they gain any significant advantage over the buy and hold investor market timing is sometimes considered to be the opposite of a long term buy and hold investment strategy however even a buy and hold approach is subject to some degree of market timing as a result of investors shifting needs or attitudes the key difference is whether or not the investor expects market timing to be a pre defined part of their strategy advantages and disadvantages of market timingfor the average investor who does not have the time or desire to watch the market daily or in some cases hourly there are good reasons to avoid market timing and focus on investing for the long run active investors would argue that long term investors miss out on gains by riding out volatility rather than locking in returns via market timed exits however because it is extremely difficult to gauge the future direction of the stock market investors who try to time entrances and exits often tend to underperform investors who remain invested proponents of the strategy say the method allows them to realize larger profits and minimize losses by moving out of sectors before a downturn by always seeking calmer investing waters they avoid the volatility of market movements when they are holding volatile equities for the average individual investor market timing is likely to be less effective and produce smaller returns than buy and hold or other passive strategies however for many investors the real costs are almost always greater than the potential benefit of shifting in and out of the market quantitative analysis of investor behavior a report available for purchase from boston research firm dalbar shows that an investor who remained fully invested in the standard poor s s p 500 index between 1995 and 2014 would have earned a 9 85 annualized return however if they missed only 10 of the best days in the market the return would have been 5 1 some of the biggest upswings in the market occur during a volatile period when many investors fled the market 1mutual fund investors who move in and out of funds and fund groups trying to time the market or chase surging funds underperform the indices by as much as 3 largely due to the transaction costs and commissions they incur especially when investing in funds with expense ratios greater than 1 1buying low and selling high if done successfully generates tax consequences on the profits if the investment is held less than a year the profit is taxed at the short term capital gains rate or the investor s ordinary income tax rate which is higher than the long term capital gains rate bigger profitscurtailed lossesavoidance of volatilitysuited to short term investment horizonsdaily attention to markets requiredmore frequent transaction costs commissionstax disadvantaged short term capital gainsdifficulty in timing entrances and exitscriticism of market timinga landmark study called likely gains from market timing published in the financial analyst journal by nobel laureate william sharpe in 1975 attempted to find how often a market timer must be accurate to perform as well as a passive index fund tracking a benchmark sharpe concluded that an investor employing a market timing strategy must be correct 74 of the time to beat the benchmark portfolio of similar risk annually 2and not even the professionals get it right a 2017 study from the center for retirement research at boston college found that target date funds that attempted market timing underperformed other funds by as much as 0 14 percentage points a 3 8 difference over 30 years 3according to research by morningstar actively managed funds have generally failed to survive and beat their benchmarks especially over longer time horizons in fact only 23 of all active funds surpassed the average of their passive rivals over the 10 year period ended june 2019 for foreign stock funds and bond funds long term success rates were generally higher success rates were lowest among u s large cap funds 4market timing faqsthe efficient market hypothesis emh states that asset prices reflect all available information according to the emh it is impossible to beat the market consistently on a risk adjusted basis since market prices should only react to new information while market timing has many benefits there are some drawbacks that should be kept in mind while adopting this approach in order to be successful at market timing it is necessary to keep a continuous check on the movement of securities funds and asset classes this daily attention to the markets can be tedious time consuming and draining each time you enter or exit the market there are transaction costs and commission expenses investors and traders who employ market timing strategies will have elevated transaction and commission costs market timing can also result in a higher tax rate because when stocks are bought and sold within a year the profit earned is taxed according to either the usual income tax rate or the short term capital gains rate finally market timing is a complex task determining the right entry and exit point can be challenging because the market and its trends keep changing constantly keith banks vice chairman of bank of america said the reality is it s time in the market not timing the market on cnbc s squawk box in march 2020 5timing the market is a strategy that involves buying and selling stocks based on expected price changes prevailing wisdom says that timing the market doesn t work most of the time it is very challenging for investors to earn big profits by correctly timing buy and sell orders just before prices go up and down investors often make investment decisions based on emotions they may buy when a stock price is too high only because others are buying it alternatively they may sell on one piece of bad news for these reasons most investors who are trying to time the market end up underperforming the broad market the biggest risk of market timing is usually considered not being in the market at critical times investors who try to time the market run the risk of missing periods of exceptional returns it is very hard for investors to accurately pinpoint a market high or low point until after it has already occurred for this reason if an investor moves their money out of stocks during a market downturn they risk not moving their money back in time to take advantage of gains from an upswing 