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Market timing
preserves your capital during downtrends so that more of your
capital can benefit from market upswings.
It attempts to predict
future market directions, usually by examining recent price and
volume data or economic data, and investing based on those
predictions.
Successfully
capitalizing on major market movements can have a profound effect
on long term portfolio results.
It can also preserve
your capital during extended bear markets, which will have a
magnifying effect over a buy and hold approach when you reinvest
your capital.
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"If one could preserve their capital by missing the worst 5
days of each year from 1966 to 2001, you would amass a portfolio
that would be 84 times as large as a buy-and-hold approach."
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Recent studies validate market timing
"The Truth about Market Timing" -
Barron's article, November 5, 2001
Author Jacqueline Doherty cites a study
showing that since 1966 the buy-and-hold investor would have turned
$1.00 into $11.71. During the same time period, if the investor
missed the 5 worst days of each calendar year, that same $1.00 becomes
$987.12. A full 84 time the buy-and-hold amount.
Obviously, it is not possible to miss the worst 5 days of each year,
but it highlights the point that market timing preserves your capital
during downtrends so that more of your capital can benefit from market
upswings.
"The Performance of Professional Market Timers" - Journal of
Financial Economics, November 2001
This study reviewed the actual performance of
professional market timers over a period of 9 years and concluded:
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evidence of significant ability to time the
market over all tests and portfolios
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most deliver returns that exceed buy-and-hold
returns
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lower levels of volatility compared to the
S&P 500 index
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