The Truth About Market Timing

The Truth About Market Timing Peter Lynch is a legend in the financial world. As the manager of the Magellan Fund at Fidelity Investments, he achieved a 29.2 per cent annual return between 1977 and 1990. That was more than double the S&P 500’s record. During this period, he led Magellan to its ranking as best-performing mutual fund in the world.

Peter Lynch had many secrets to his success, but “market timing” wasn’t one of them.

In fact, he cautioned investors: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves. … I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world.”

Despite its poor track record, “market timing” is a concept that keeps failing upward. It is embraced by authors of myriad how-to investing books. It is a theme on many radio financial advice programs. It’s an easy sell: After all, doesn’t it seem logical to turbocharge equity performance by continually reallocating investments in a portfolio, based on insight, research and intuition?

When it works, it can be a profitable strategy. But it rarely does work for the small investor. A key reason is that the factors which influence markets are often unknowable.

Financial markets have their own peculiar psychology, reacting to events in unexpected ways. They do not have a predictable rhythm or cadence.

One of market timing’s many paradoxes is that during times of panic, its popularity grows. Market timers tend to buy more as equity values rise and flee when markets turn bearish.

Once an investor understands the risks of market timing — sometimes after a portfolio has cratered — a steady approach becomes much more attractive. Dollar-cost averaging is an example of a safe strategy that is nearly the polar opposite of market timing.

Investors who use the dollar-cost averaging investment strategy don’t purchase securities based on predictions of market peaks and troughs, but rather invest fixed amounts at regular intervals over time. Because the amount invested is always the same, the investor buys more shares when prices fall and fewer shares when prices rise. This practice may yield a lower average cost per share.

Many individuals use dollar-cost averaging without fully realizing it, such as with regular contributions to company retirement plans.

Investment vehicles that do not require transaction fees are often a good fit for the dollar-cost averaging investor. No-load mutual funds are a popular choice. These funds will often waive required minimums when an individual signs up for an automatic

contribution plan, and allow the investor to open a money market fund from which regular contributions to the mutual fund can be drawn.

Dollar-cost averaging does not ensure a profit or prevent losses, but instead involves regular pre-planned investments in securities regardless of fluctuating prices. It’s an effective way for investors to accumulate shares, create wealth and achieve long-term goals.

Important information about mutual funds is found in the Fund Facts document. Please read this carefully before investing. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Unit values and investment returns will fluctuate.

Insurance products, including segregated fund policies, are offered through Beyond Business Financial Solutions Inc., and Investment Representative Nathan Garries offers mutual funds and referral arrangements through Quadrus Investment Services Ltd.