Market timing refers to any strategy that involves trying to predict future price movements and shifting between different investments to take advantage of them. To take a simple example, if you believe that shares are likely to fall and bonds to rise over the next month, you would buy bonds and sell shares. You would only intend to hold these positions for as long as you think bonds will keep beating shares: as soon as you think the trend will reverse, you would buy shares and sell bonds.
These predictions and trading decisions may be based on economic data: in the example above, you might believe that GDP growth will be much worse than expected and investors will dump shares because they fear a recession is coming. They could be derived from trends or patterns that you think you can see in price charts (known as technical indicators); you might think a bull market looks as though it is coming to a peak or that a bear market is near a bottom. Or they might be influenced by other major events, such as the threat of a war and the impact that you think it will have on markets.
All of these involve an attempt to predict not only what will happen and how it will affect asset prices, but when that will occur. If you get the timing wrong, you can easily lose money even if your prediction eventually turns out to be correct.
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That‘s part of the reason why market timing is so difficult, together with higher costs. If a buy-and-hold investor buys a stock that they think is cheap and their analysis is correct, they should make a profit, even if it takes longer than expected, as their costs will be relatively low. But if a market timer regularly changes their positions based on what they think will happen, they will incur higher costs. Unless their predictions are very often correct, these costs will eat into their profits. Studies suggest that most market timers do worse than buy-and-hold investors.
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