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FP Article 15.13 (To sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

Investment Risk - Market Timing Risk

by Rajen Devadason

Market Timing is a wicked idea. Don't try it - ever.

Charles D. Ellis

  Market timing risk is different from pure market risk. You see, market risk affects all investors in a particular market. But market timing risk is realised - or taken on willingly - by those who attempt to time the market.

Many studies have indicated that time spent in a market is of far greater value than time spent attempting to time a market.

Having said that, it is important to recognise the allure of market timing. 








For one thing, the potential gains from getting a market timing bet right can be enormous.

However, because investment markets are seldom predictable, most market timers tend to only get things right once in a long while; and pay huge prices when they don't!

This is an article explaining market timing risk. I hope you enjoy reading it. But if it isn't what you're looking for, you're welcome to search for something that better meets your needs. Thank you for allowing me to serve you.

Rajen Devadason

Web www.FreeCoolArticles.com










A great way to overcome the temptation to market time is to write yourself an Investment Policy Statement (IPS), which clearly states the goals of the portfolio and the specific conditions that trigger sensible asset reallocations.

Let me share with you a hypothetical situation that might arise in my own country of Malaysia:

The Malaysian stock market, which was once known as the Kuala Lumpur Stock Exchange, is now officially called Bursa Malaysia. The primary benchmark index of Bursa Malaysia is the KLCI or the Kuala Lumpur Composite Index. Bear that in mind, as I take you through a series of mock stock market gyrations:

Let's imagine you have a well-chosen portfolio of Malaysian stocks, which you've put together over several years.

After a long period of inactivity and range bound motion between 700 and 800 points, the market surges! You decide that with the CI now at 900 points, let's say, you will liquidate your entire portfolio.

Once you're done, the market flies upward a few hundred points more!

You are frustrated and tell yourself the next time something like that happens - hopefully after a subsequently severe correction - you wonít repeat the same mistake.

In due course, the market corrects. It falls to, say, 600 points before starting to creep up. You re-enter the market at 650 points and vow not to repeat your old mistake.

A year later, the market again soars to 900 points. This time you remain firm. It continues up for another two days and then, at perhaps 920 points, it plummets. You think the fall is just a temporary pull-back and continue to delude yourself as the CI falls to 500 points and below.

Youíve failed again; this time by guessing incorrectly in the opposite direction. In both cases, there was an element of realised market timing risk.

A few more painful episodes like this are enough to convince most intelligent investors that they simply donít have the capacity to correctly and consistently time the market for profit.

I suggest you take the time (no pun intended) to look deeply at your own personal capacity for investment risk in general and market timing risk in particular.

Try to develop your personal understanding so that you reduce the future likelihood of committing risk-induced portfolio suicide at the beguiling altar of market timing.

If you'd like to continue to learn more about other types of investment risk, here's additional information for you...

15 Types of Investment Risk (OR, to sign up for a FREE 16-lesson eCourse on Investment Risk, please click here.)

1. Borrowing Risk

2. Company Risk

3. Credit Risk

4. Currency Risk

5. Diversification Risk

6. Industry Risk

7. Inflation Risk

8. Interest Rate Risk

9. Liquidity Risk

10. Lost Opportunity Risk

11. Manager's Risk

12. Market Risk

13. Market Timing Risk

14. Political Risk

15. Prepayment Risk



© Rajen Devadason

Web www.FreeCoolArticles.com






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Rajen Devadason, CEO RD WealthCreation Sdn Bhd & RD Book Projects
349, Desa Rasah, Jalan Bayan 7, 70300 Seremban, NS, Malaysia
Tel/Fax: +606 632 8955