Although choosing
mutual funds
certainly requires looking at the conditions of the economy and markets as a whole, making decisions to buy or sell by trying to time the market rarely yields satisfactory results.
Market timing
means regularly attempting to shift assets to that part of the market that's currently providing the best return. For example, a market timer might move from
stock funds
to
bond funds
or
money market funds
in hopes of escaping a stock market dip, then shift the assets from bond or money market funds back to stocks in an attempt to ride the next stock market wave. But what usually happens is the opposite: You end up in the market for the dips, but out of the market for the rallies.
The problem is that there's no infallible signal that says when you should get into or out of stock or bond funds. And when your money is at stake, it's easy to be swayed by impulses, such as emotional reactions to market swings and hasty reactions to reports from the financial press. It can be difficult to keep perspective. You just have to remember that the media's conventional wisdom of the day isn't always an accurate indicator of future market conditions.
The other problem with trying to time the market is that it may mean rapidly turning over your fund holdings, which can be costly. You should always consider how much you'd pay in sales
loads,
redemption fees,
and
capital gains taxes
— especially on short-term gains — before you make changes to your portfolio.
Marc Lackritz
