The perils and pitfalls of stock market timing: buy and hold is a sound idea. But don't sit back and coast

Money Digest, Sept, 2002 by Ted Canning

Most investors are content to leave their investment decisions to the professionals. They feel mutual fund managers have the expertise and temperament to juggle a portfolio, adding or dropping stocks whenever necessary. However, some investors are tempted to time the market themselves--a brave endeavour, indeed.

"Beating the market" requires lots of hard work and, often, innate knowledge: a feel for when the market will rise or fall. It's not easy. Even experts will admit their failures in market timing, especially those who were swamped by the October, 1987 stock market crash.

Truth is, the average investor will have tittle time to monitor the daily factors that affect the market. That's not to mention the unpredictable situations that can send a market soaring or into free-fall. Professional fund managers, meanwhile, watch the market full-time. They evaluate trends such as consumer confidence levels, house-building activity and corporate profitability, along with economic indicators, such as interest rates and retail spending. All of these factors can contribute to a market's timing performance.

Furthermore, many professionals believe that bull (rising) and bear (falling) markets precede turns in the economy on an average of 11 months. In other words, it is beneficial to look more than one year into the future. And the challenge in trying to guess the market's direction is that you have to be right both times--knowing when to get out and when to get back in.

So what does all this mean? It means that for many investors, opting for mutual funds and adhering to a "buy-and-hold" strategy is a sound idea. After all, mutual funds provide you the benefit of owning stocks while alleviating some of the risks and costs involved in purchasing a stock directly.

But don't confuse "buy and hold" with "sit back and coast." Although this strategy calls for patience and discipline, you still need to monitor your funds closely to ensure they are performing consistently. As well, you need to watch for any changes in a fund's management and management policy that could adversely affect performance. You also need to ensure that the funds you hold remain consistent with your financial needs and objectives.

And if you wish to facilitate this process even further? Then consider the expert advice and guidance of an Investment Advisor, who can help you build and rebalance your portfolio as needed.

Ted Canning is a Investment Advisor with CIBC Wood Gundy (York Region, ON Branch). Phone 1-800-225-9839.