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Market timing

Buying or selling financial assets based on predictions of market trends.

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Expanded Definition

In 2008, many stocks hit lows they hadn’t touched in years. At that point, market timers were trying to figure out whether the market had “hit bottom” (time to buy) and, more important, when things would recover, thereby pushing stock prices back up again -- and giving these investors an opportunity to sell at high prices.

Rather than focusing on individual stocks, market timers use certain tools to predict where the market as a whole will move next. These can include fundamental indicators, technical indicators, or economic data. They buy and sell based on the predictions that come out of this research, versus buying and holding certain stocks for the long term.

We here at the Fool are advocates of the long-term, “buy-and-hold” approach and haven’t seen enough evidence of success to get behind a market-timing investment strategy. In 1993, The Hulbert Financial Digest, a publication that tracks the performances of numerous investment newsletters, found that in the 12.5 years it had been tracking the returns, the best market timer outpaced the broader market by only 1.2 percentage points per year.

More recently, IESE Business School professor Javier Estrada reported the results of an important study, in which he looked at 15 major stock markets around the world over a several-decade period. Estrada discovered that, out of more than 160,000 trading days, less than 0.1% of the days considered for his study made a difference to long-term returns. You can learn more in this article and get more details regarding market timing from the articles below.

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