When it comes to buying mutual funds, all types of investments are a form of market timing, even if you use a buy-and-hold investment strategy. For example, when you decide to buy a mutual fund, you’ve decided what to buy and when to buy it. The same applies to the selling side: you decide which investment to sell, how many shares to sell, and when to sell them, which incorporates the idea of timing.
1. Identify and Overcome Your Worst Enemy
One of the biggest mistakes investors can make is becoming reliant on harmful emotions like fear, greed, anxiety, and the desire for control, which can be mitigated or moderated by the virtues of humility and patience. When you make decisions knowing that it’s impossible to “beat the market,” and you realize that results are usually not immediate, you begin to reduce the odds of making bad decisions, which are typically those based on emotion. These bad decisions can come from external sources such as financial media. Do you read articles that trigger emotional buttons, such as “How to Get Rich Quickly Using Market Timing? ” Try to keep your consumption of information as fact-based as possible. If you feel the need to stay connected to a site that loves to provoke emotion, make sure to balance it with another source grounded in reality.
2. Value vs. Growth vs. Index
Whether you are building a portfolio of mutual funds from scratch or looking for the best way to enhance the performance of your current investment mix, it’s wise to understand where value and growth strategies work best in the market cycle.
Growth strategies (growth equity mutual funds), as the name suggests, tend to perform best during the mature stages of the market cycle when the economy is growing at a healthy rate. The growth strategy reflects what companies, consumers, and investors are all doing in healthy economies at the same time, which is acquiring expectations for increasing future growth and spending more money to do so. Technology companies are good examples here, as well as other industrial sectors like energy or alternative fields like precious metals funds. They are usually valued highly but can continue to grow beyond those estimates when the environment is right.
Value strategies (value equity mutual funds) usually outperform growth and blend (index) during recessionary environments. Think of 2002 when the “dot-com bubble” burst completely, and growth was on the decline. In 2008, the peak of the Great Recession, value dominated growth.
3. The Best Time to Invest in Small-Cap Stocks
The conventional wisdom on the best time to invest in small-cap equity funds varies. Some say they perform best in rising interest rate environments, but small-cap stocks can emerge as leaders early in an economic recovery when interest rates may be relatively high and declining.
This is because small companies can start to recover in growing economies faster than large companies since their collective fate is not directly tied to interest rates and other economic factors that help them grow. Like small boats in the water, small companies can move faster and navigate more precisely than large companies that move like massive ships.
4. Timing with Mutual Fund Flows
Mutual fund flows, commonly referred to as “fund flows,” refer to how investors are putting their money into mutual funds. Flows are metrics of the dollars that are flowing into or out of mutual funds. Some investors use fund flows as a leading economic indicator, meaning that one can gain insights about the direction the economy may take in the near future by monitoring how mutual fund investors are investing today.
If
The fund flows were positive when more dollars flow into mutual funds than flow out; investors may interpret this as a sign that the economy is trending positively in the near future.
5. Using Mutual Funds in Bear Markets
Mutual funds in bear markets are mutual fund portfolios that are built and designed to achieve profits when the market is declining. To do this, bear market funds invest in short positions and derivatives, and 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 an investor sees compelling evidence of a bear market.
6. Timing the Market Using Sectors
There are many different industrial sectors, such as healthcare, finance, and technology, and each sector tends to perform well during different stages of economic expansion and contraction. Therefore, it is possible to time the market using sector funds or ETFs. While there is no guaranteed way to time the stock market, adding sectors in small proportions to an investment portfolio, such as three or four sector funds or ETFs specializing at 5% each, can add diversification (reduce market risk) and effectively increase portfolio returns.
7. Momentum Investing: Timing and Strategy
Most often, especially with mutual funds designed to capture a momentum investing strategy, the idea is “buy high and sell higher.” For example, a mutual fund manager may seek to find growth stocks that have shown trends of continuous price appreciation in the hope that the upward price trends will continue. This timing is usually in the later stages of a bull market, where stock prices have generally risen for more than a couple of years and the economic cycle is nearing maturity stages.
For most investors, the best approach is to use a good growth index fund such as the Vanguard Growth ETF (VUG) or an actively managed growth mutual fund such as the Fidelity Growth Company Fund (FDGRX).
8. Using Tactical Asset Allocation
Tactical asset allocation is an investment style where the three core assets (stocks, bonds, and cash) are actively balanced and adjusted by the investor with the aim of maximizing portfolio return and reducing risk relative to a benchmark index such as the S&P 500. This style differs from technical and fundamental analysis styles in that it focuses primarily on asset allocation and secondarily on security selection.
The aspect that makes this investment style tactical is that the allocation will change based on prevailing (or expected) market and economic conditions. Depending on these conditions and the investor’s goals, the asset allocation to a specific asset (or more than one asset) can be neutral, overweight, or underweight.
It is important to note that tactical asset allocation differs from absolute market timing because the approach is slow, considered, and methodical, while timing typically involves more frequent and speculative trading. Therefore, tactical asset allocation is an active investment style that has some passive investment qualities in that the investor is not necessarily getting rid of asset types or investments but is merely changing the weights or percentages.
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