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Chapter 7. Timing the Market > All Types of Market Timing

All Types of Market Timing

The investment industry considers market timing to be the decision of when to buy into the stock market and when to get out of the stock market. That is, a market timer will put his or her portfolio in stocks when he or she thinks the market is going up. If the signals being followed change, then the stocks will be sold and the money placed in a money market fund to earn interest. This cycle of buying into the stock market and then liquidating continues during the pursuit of higher returns. Market timers also claim that they are taking less risk than the buy-and-hold investor is. This is because they are invested in money market funds much of the time.

Although true market timers are less common, most investors routinely conduct some form of market timing. Many investors use a form of market timing for individual stocks. They follow a specific stock and notice that the stock seems to trade in a price range. They buy the stock at the low price, wait until the stock price rises to the high price, and then sell and wait for the price to fall again. This strategy seems to work for a while, but beware. The stock price can fall far below its “low range” after you buy or rise far above its “high range” after you sell. That is, these patterns seem to only last long enough for you to identify them and maybe profit through a cycle or two. But it is very difficult to beat the S&P 500 Index in the long run when timing the market.


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