When investing in bonds, stocks, or mutual funds, investors have the opportunity to increase their rate of return by timing the market – investing when stock markets go up and selling before they decline. A good investor can either time the market prudently, select a good investment, or employ a combination of both to increase his or her rate of return. However, any attempt to increase your rate of return by timing the market entails higher risk. Investors who actively try to time the market should realize that sometimes the unexpected does happen and they could lose money or forgo an excellent return.
Timing the market is difficult. To be successful, you have to make two investment decisions correctly: one to sell and one to buy. If you get either wrong in the short term you are out of luck. In addition, investors should realize that:
1. Stock markets go up more often than they go down.
2. When stock markets decline they tend to decline very quickly. That is, short-term losses are more severe than short-term gains.
3. The bulk of the gains posted by the stock market are posted in a very short time. In short, if you miss one or two good days in...
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