Is Timing The Market Gambling or Good Risk Management?
Most pop culture finance articles advocate a buy and hold investment strategy. This is where the investor invests the money and leaves it alone for the long haul. Pop culture finance also advises to re-balance once a year - sell some of the winning stocks and add back to the investments that didn't have such a good year. Beyond this Holy Grail of investing, you never attempt to "time" the market because that is always a "mistake" -according to pop culture finance.
What is timing the market? It is moving money in and out of stocks trying to get out and in at the best time possible. Actually, that is more like day trading. Selling your stocks and getting out of the market or a certain percentage of your investments because you want to reduce risk is not timing the market. It is no wonder investors are so confused. This article from USA Today gives a good example of confusing pop culture finance writing.
In the article it states:
"If you have a longer time horizon, but can't withstand short-term volatility (risk/loss) in your portfolio, reduce your exposure to stocks. The lower the percentage of stocks in your portfolio, the lower the volatility."
I have never heard a pop culture finance writer advocate moving money out of stocks. That is, buy and hold blasphemy!! (Sorry couldn't resist) Now in the same breath, the article also gives this piece of advice.
"Trying to time the market by interpreting or anticipating the effect of daily news on future market prices is gambling and not investing."
This is where pop culture finance is sending mixed messages about managing risk versus market timing. The statement about lowering volatility or risk can be good risk management. According to most pop culture finance articles, it is also referred to as timing the market. If you reduce the exposure to stocks in your portfolio, you are in effect, timing the market, and according to this article, that is ok. However, if you are trying to make decisions by "interpreting or anticipating the effect of daily news on future market prices," then you are "gambling."
So, in this example, why would a person reduce exposure to stocks in a portfolio? Best guess would be because of the volatility or risk in the market.
What produces the volatility in the market? THE NEWS!
The financial services industry makes it as if selling anything in your portfolio and getting out of the market is market timing and a bad thing. Yet, this article refers to it as gambling in one breath and then advising you to do so if you want to reduce risk.
Veering away from buy and hold is not market timing. It is called risk management. If you feel you have too much in stocks and are taking too much risk, then the prudent thing to do is to reduce your stock exposure…just don't make the mistake of thinking you are "gambling."
It is no wonder investors stay confused.