How to Time the Market With Mutual Funds

Timing Strategies for All Investor Types

money and time concept
Market timing with mutual funds may not be what you are thinking. Photo: fandijki/iStock

When it comes to buying mutual funds, all investing is a form of market timing, even if you employ a buy-and-hold investing strategy. For example, when you make a decision to buy a mutual fund, you have chosen what to buy and when to buy it. The same goes on the sell side: You decide which investment to sell, how many shares to sell, and when to sell it, all which incorporates the idea of timing.

As with all investment strategies and financial plans, there are many ways to be successful. You just need to find one or two strategies that work for you, and stay with them.

Here are 10 ways to time the market with mutual funds:

1. Identify and Overcome Your Worst Enemy

To paraphrase legendary investor, Ben Graham, the investor's worst enemy is often themselves. Perhaps the biggest mistake an investor can make is to become blinded by damaging emotions, such as fear, greed, anxiety, and desire for control, all of which can be minimized or neutralized by the virtues of humility and patience.

When you make decisions knowing that it is impossible to "outsmart the market," and you realize that results are not often instantaneous, you begin to reduce the odds of making poor decisions, which are usually those that are based upon emotion. These poor decisions can come from outside sources, such as financial media.

Are you reading articles that press emotional buttons, such as "How to Get Rich Quick With Market Timing"? Try to keep your information consumption as fact-based as possible. If you feel the need to stay connected with a site that likes to provoke emotion, be sure to balance it with another source that is more reality-based.

2. Value vs. Growth vs. Index

Whether you are building a portfolio of mutual funds from scratch or looking for the best way to boost performance of your existing investment mix, you are wise to understand where in the market cycle the value and growth strategies work best.

Growth strategies (growth stock mutual funds), as the name implies, typically perform best in the mature stages of a market cycle when the economy is growing at a healthy rate. The growth strategy reflects what corporations, consumers and investors are all doing simultaneously in healthy economies, which is gaining increasingly higher expectations of future growth and spending more money to do it. Technology companies are good examples here, as are other industrial sectors such as energy or alternative areas, such as precious metals funds. They are typically valued high but can continue to grow beyond those valuations when the environment is right.

Value strategies (value stock mutual funds) typically outperform growth and blend (index) during recessionary environments. Think of 2002 when the "dot com bubble" had fully burst, and growth was around the corner. In 2008, the peak of The Great Recession, value dominated growth.

3. Best Time to Invest in Small-Cap Stocks

Conventional wisdom is mixed on when is the best time to invest in small-cap stock funds. Some say they do best in rising interest rate environments but small-cap dominance can often occur early in economic recovery, when interest rates may be relatively high and falling.

The reasoning is that small companies can begin to rebound in growing economies faster than larger companies because their collective fate is not tied directly to interest rates and other economic factors to help them grow. Like a small boat in the water, small companies can move more quickly and navigate more precisely than the large companies that move like giant ocean liners.

4. Timing With Mutual Fund Flows

Mutual fund flows, which are usually called "fund flows," indicate how investors are investing their money in mutual funds. The flows are measures of dollars flowing into or out of mutual funds. Some investors use fund flows as a leading economic indicator, which means that clues about which direction the economy may be heading in the near future can be obtained by observing how mutual fund investors are investing today.

If, for example, fund flows are positive, when more dollars are flowing into mutual funds than flowing out, investors may consider that a sign that the economy is heading in a positive direction in the near future.

5. Using Bear Market Mutual Funds

Bear market funds are mutual fund portfolios built and designed to make money when the market is falling. To do that, bear market funds invest in short positions and derivatives, thus their returns generally move in the opposite direction of the benchmark index. Therefore, the best time to use bear market funds is near the end of a bull market or when the investor sees compelling evidence of a bear market.

6. Time the Market With Sectors

There are several different industrial sectors, such as health care, financials and technology, and each sector tends to do well during various phases of economic expansion and contraction. Therefore, it is possible to time the market with sector funds or ETFs. While there is no foolproof method of timing the stock market, adding sectors in small portions to an investment portfolio, such as three or four sector funds or ETFs allocated at 5% each, can actually add diversification (reduce market risk) and potentially increase portfolio returns.

7. Momentum Investing: Timing and Strategy

Most commonly, and especially with mutual funds designed to capture the momentum investing strategy, the idea is to "buy high and sell higher." For example, a mutual fund manager may seek growth stocks that have shown trends for consistent appreciation in price with the expectation that the rising price trends will continue. This timing is usually in the latter stages of a bull market, where stock prices have been generally climbing for more than a few years and the economic cycle is approaching mature stages.

For most investors, the best approach is to use a good growth index exchange traded fund, such as Vanguard Growth ETF (VUG) or an actively managed growth mutual fund, such as Fidelity Growth Company Fund (FDGRX).

8. Using Tactical Asset Allocation

Tactical asset allocation is an investment style where the three primary asset classes (stocks, bonds and cash) are actively balanced and adjusted by the investor with the intention of maximizing portfolio returns and minimizing risk compared to a benchmark, such as an index. This investing style differs from those of technical analysis and fundamental analysis in that it focuses primarily on asset allocation and secondarily on investment selection.

The part of this investing style that makes it tactical is that the allocation will change depending upon the prevailing (or expected) market and economic conditions. Depending upon these conditions, and the investor's objectives, the allocation to a particular asset (or more than one asset) can be either neutral-weighted, over-weighted or under-weighted.

It it important to note that tactical asset allocation differs from absolute market timing because the method is slow, deliberate and methodical, whereas timing often involves more frequent and speculative trading. Therefore, tactical asset allocation is an active investing style that has some passive investing, buy and hold qualities because the investor is not necessarily abandoning asset types or investments but rather changing the weights or percentages.

9. Using Technical Analysis

Technical analysis is a market timing technique that is disputed by the efficient-market hypothesis (EMH) which states that all known information about investment securities, such as stocks, is already factored into the prices of those securities. Therefore no amount of analysis can give an investor an edge over other investors.

Technical traders often use charts to recognize recent price patterns and current market trends for the purpose of predicting future patterns and trends. There are particular patterns and trends that can provide the technical trader certain cues or signals, called indicators, about future market movements.

For example, some patterns are given descriptive names, such as "head and shoulders" or "cup and handle." When these patterns begin to take shape and are recognized, the technical trader may make investment decisions based upon the expected result of the pattern or trend.

10. Buy and Hold Strategy

Yes, even buy-and-hold is a form of market timing. If you consider that each time you buy shares of stocks, bonds, mutual funds or ETFs, you are choosing the time and number of shares or dollar amount, you have timed the purchase!

Although much of buy-and-hold is considered passive investing, especially when investors employ a "set it and forget it" philosophy with tactics such as dollar-cost averaging, buy-and-hold is still timing, although in the slightest degree.

Market timing typically has an investor buying and selling over shorter periods with the intention of buying at low prices and selling at high prices, whereas buy-and-hold typically involves buying at periodic intervals, without little or no regard to price, for the purpose of holding for long periods of time.

Furthermore the buy-and-hold investor will argue that holding for longer periods requires less frequent trading than other strategies. Therefore trading costs are minimized, which will increase the overall net return of the investment portfolio. Put simply, the buy-and-hold investor believes "time in the market" is a more prudent investment style than "timing the market."

A Word of Caution on Market Timing

Market timing is an investment strategy where the investor makes investment decisions to buy or sell investment securities, based upon predictions of the future. But is market timing wise? The question of whether or not market timing is wise for the mutual fund investor can be answered by asking another question: Is it possible to predict the future? The short answer is no. A market timer, however, believes that it is possible to buy stocks or mutual funds at low prices and sell at high prices based upon their assessment of future market and economic activity.

Most would agree that market timing may be possible over short periods of time but it is more difficult to consistently and accurately predict stock market movements over long periods of time. One can certainly predict the future but this does not mean that predictions will come true. For the average investor a diversified portfolio of mutual funds, held for the long-term, is the best strategy. Building a portfolio of mutual funds is best applied when the investor has carefully considered their investment objectives (i.e., time horizon and financial goals) and tolerance for risk (i.e., feelings or emotions about the ups and downs of the stock market).

Frequently Asked Questions (FAQs)

What is one disadvantage of market timing?

One disadvantage of market timing is that, even when it works better than passive investing, it takes a significant amount of time and effort. If you don't have the time or patience to study market conditions and choose investments, then that disadvantage might outweigh the potential benefits.

What is market timing for 401(k) accounts?

Depending on how your 401(k) works, you may have limited options for how your 401(k) funds are invested. You should at least have the ability to shift your portfolio's balance of stocks and bonds. If that is your only option, and you want to practice market timing, you could shift to stocks during bull markets and shift to bonds during bear markets.

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  1. Benjamin Graham, Jason Zweig, and Warren E. Buffet. “The Intelligent Investor: The Definitive Book on Value Investing,” Page 8. HarperCollins, 2003.

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