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Market timing is a strategy in which the investor tries to avoid losses by timing the buying or selling in the market. Timing the market requires accurate prediction of when to move in and when to move out of the market next to impossible. The demand and supply components of the market determine the price of the individual stock. If the demand increases more than the supply, the prices rise and vice versa. Investor’s behavior is irrational. Hence, one cannot accurately predict the exact timing of the market rebound.
When investors pull their money out of the market, they risk missing out on gains if the stock market surges upward. Similarly, the investor also runs a risk of keeping the stock market’s money while waiting for the stock market to surge. The risk is definite. This is because the market is highly volatile, and returns can be either on the very higher or lower sides. Even professionals with expertise and sophisticated algorithms or software cannot timely predict the market.
Successful market timing would require two things to know, exactly when to put money into the market and when to pull the money out of the market. Trying to time the market to avoid the risk opens up more trouble. One should avoid temptation and accept that the stock market’s investment will not always give you the highest possible returns. The odds are that you may sell too early or buy too late.
Many times the market gets hit by the occurrence of an unpredictable event. For instance, say a natural disaster or any other instance that affects the larger economy. On the contrary, the investor may have missed the multi-bagger opportunities. It forces them to either stay in the market unless the market corrections take place or withdraw money by accepting the average market returns.
Hence, the investor must not try to time the market but instead place the money in high-quality, non-correlated stocks or an index fund for a long-term period.