The Importance of Market Timing

The rebound in stocks that started in the spring of 2009 continues with full force to the present, albeit with some ups and downs. Yet many people have decided to stay away from equity investments. The losses in 2008 were so big that a lot of investors are too fearful to re-enter the market. Some of these investors lost so much money that they do not have the capital to come back.

If investors do not have a strategy to preserve their capital they cannot keep coming back into the market. In other words, you have to be able to come back into the ring to fight again. Money managers that dismiss market timing believe that if you are in for the long term then you should be able to stomach up to 50% loss in your portfolio. This is so unacceptable to just about every retail and institutional investor. The only way to avoid major down turns is to be able to have a timing mechanism to enter and exit the market.

Market timing works. And if you have a good system you should be able to catch the trend. You also have to be able to take small losses in order to catch the big runs. This necessitates a rigorous risk-control mechanism. You may not catch the top or the bottom but you will catch the meat of the run. Don’t be greedy trying to hit a home run. Trade with risk control. Do not be concerned about the outcome of one or two individual trades. Have a system and stick to it. If you stay disciplined you will win in the long term. This requires patience to stay in cash during major down turns and melt downs.

If you are planning to do this using ETFs as a market timing mechanism, start familiarizing yourself with these top ETFs of the world that trade on NYSE: SPY (S&P 500); QQQQ (NASDAQ 100); EFA (Europe, Australia and Japan); EEM (Emerging Markets) and XIU (Canada).