To get better rate of return, investors can time the market by investing in bonds, stocks, or mutual funds that means investing as stock markets rise and selling before they go down.
A good investor can either time the market intelligently or go for a good investment, or use a blend of both for higher rate of return. But trying to time the market, just for higher returns carries higher risk. Investors proactively timing the market should accept that at times, unforeseen happens and they can suffer a loss or give up higher return.
It is impossible to time the market. The successful investment is based on two decisions that should be taken correctly: selling and buying. Any wrong decision in the short term means you stand to suffer a loss.
Besides investors should understand that:
Stock markets rise more frequently than they fall.
When stock markets go down, they fall quite rapidly. Hence short-term losses are quite harsher than short-term gains.
Majority of the stock market gains are earned in very short time. So if you skip 1-2 profitable days in the stock market, you tend to lose majority of the gains.
Very few investors can time the market properly. The results of a comprehensive study of institutional investors concluded that the median money manager increased the value slightly by choosing investments that exceed market indices. The best money managers increased the value over 2% each year because of good stock selection. But the median money manager forfeited value by timing the market. Hence investors should understand that market timing can increase value, but there are superior strategies to increase gains, reduce risk and succeed more often.
The reason timing the market is difficult is because of the problem of eliminating emotion from your investment decision. Emotional investors choose to overreact; they invest when the prices are at the peak and sell when prices fall down. Professional money managers do not carry emotions while investing, can increase the value by proper timing of their investments. However most of the higher rates of return can be obtained by security selection and other investment strategies. Investors looking for higher returns by market timing should opt for a good Tactical Asset Allocation fund. These funds try to increase value by altering the investment mix between cash, bonds, and stocks by adopting strict protocols and models , instead of emotional market timing.