Is It All In The Timing?

No matter how hard advisers try to discourage them, many investors in mutual funds will always be market-timers.

It’s pure human nature, the impulse to try to beat the game by outguessing the ups and downs of the economy.

So what if the experts declare that you can’t win - that success at jumping in and out of investments requires not just occasional flashes of inspiration or luck, but an ability to outthink a very smart crowd consistently, time after time?

Some market-timers wear the label openly. Others take all the vows of long-term investing, but yield to the temptations of timing when things get hot.

“A huge number of investors think they are buy-and-holders, but in fact use the ICSIA system of market-timing,” says Paul Merriman, a Seattle adviser who publishes the newsletter Fund Exchange.

ICSIA, he explains, is short for “I can’t stand it anymore.” It leads to buying near the top, when people tire of watching bull markets from the sidelines, and selling near the bottom, when the pressure of falling prices passes the threshold of intolerability.

“Though this is probably the most widely used timing system in the world, we don’t recommend it,” he observes.

What Merriman, himself a veteran member of the market-timing school, does suggest is to pick an approach with a lot of self-discipline.

First of all, he says, “use mechanical systems that can be tested over decades of market cycles. Don’t rely on predictions or intuition, either your own or those of the experts. Intuition is wonderful in many areas of life, but it’s not reliable when applied to investments.”

In addition, he urges, remember that timers aren’t exempt from the need to protect themselves by diversifying across different types of investments. “Let your need for return and your tolerance for risk tailor a balance between U.S. and international investments and a balance between fixed-income and equity funds,” he says.

Next, he declares, “make sure your timing discipline is actually implemented. Hire a manager or a friend if necessary. If you are a do-it-yourselfer and you second-guess a signal by not acting on it, or if you go on a vacation and miss a signal, you can quickly become out of synch with your discipline. Once that happens, you may have a devil of a time getting back on track.”