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Forget Market Timing

- Alan Lavine and Gail Liberman

There has been lots of fuss lately over big-time investors cutting deals with mutual funds to time the markets.

Market timers typically use price trends and financial indicators to move in and out of stock and bond funds.

But a recent study by Dalbar Inc., Boston, indicates that the market timers could well be the losers rather than average investors in the latest mutual fund scandal.

Itıs true that the Securities and Exchange Commission raises some important issues. Market timing can foul up a fund managerıs investment tactics, hurting other shareholders and increasing fund expenses. Fund managers like to buy attractive stocks when prices are low. But how can they do this if theyıre forced to use all their cash to meet fund redemptions?

Meanwhile, when stocks roar upward, too much money flows into a fund. This forces the manager to buy stocks when prices are too high.

Nevertheless, examining the flows in and out of mutual funds for the last 20 years, the Dalbar study found that market timers in stock mutual funds lost -3.29 percent annually on average.

The average investor earned 3.29 percent annually on average.

Those who pursued a consistent investment strategy, such as dollar cost averaging, earned 6.8 percent annually.

Over the same period, simply buying and holding the stocks that make up the S&P 500 index achieved an attractive 12.98 percent annual return. Lou Harvey, president of Dalbar, has conducted a number of studies over the years that show staying put in a well-managed mutual fund for the long term is the best way to invest.

Once you try to time the markets, the average investor tends to buy when stock prices already are high and sell after stock prices have hit bottom.

Other financial research has shown that market timing can outperform the market over short periods due to chance. For market timing to be more than just luck, the system, based on statistics, would have to outperform the market for 70 years. It doesnıt, research indicates.

Bottom line: Now that mutual funds are limiting market timers, there is little reason to be concerned if you are a long-term investor rather than a hot-shot market timer.

The best advice: Keep it simple. Invest in a low-cost stock fund that tracks the performance of the S&P 500. Invest regularly. Over the long term, the average cost of your fund shares should be less than the market price when you sell.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

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