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Why timing markets can be risky business

Morningstar, Vanguard, Russ Kinnel, market timing, stock picking, equity markets

Trying to time markets can seem like a good way to earn a little extra, but it comes with risk and often results in lower returns than sticking to a long-term strategy, according to equity researcher Morningstar.

Comparing the average fund returns for funds invested in a particular asset class with the average returns achieved by those funds’ investors will reveal a gap in returns, Morningstar research manager Russel Kinnel says.

Mr Kinnel said the difference in funds’ official returns and investor returns is a product of investors’ timing.

“If you think about it, the difference between investor returns and the official returns are essentially telling you how good the investors’ timing was,” he said.

“Sometimes its positive, sometimes they do better, but in general, they do a little worse than the actual returns because human nature, being what it is, we tend to buy after a fund has had a good run and sell after its had a poor run.”

Vanguard, which produces a number of fund products, found a similar trend in its research.

“While it is possible for a market-timing strategy to add value from time to time, on average these strategies have not consistently produced returns exceeding market benchmarks,” the company said.

“Empirical research conducted in both academia and the financial industry has repeatedly shown that the average professional investor persistently fails to time the market successfully.”

Both companies cautioned that trying to time markets comes with risk, with Vanguard saying investors should “arm themselves with a long-term perspective and a disciplined approach” to avoid making costly, impulsive decisions.

Why timing markets can be risky business
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