How Does Mutual Fund Timing Hurt Investors?

Implementing the right mutual fund timing might seem very difficult at times as an investor. Mutual funds provide investors with a unique tool to diversify their portfolios. However, without the right timing, all of their investment efforts could be in vain. Here are the basics of how mutual fund timing affects investors.

Mutual Fund Timing

In the world of investment, timing is everything. While it might seem more applicable to the stock market, this rule still applies to those that invest solely in mutual funds. Mutual funds are made up of a collection of stocks, bonds or other securities. Therefore, the movements of the individual securities affect the return of the overall portfolio. If the market is moving, you need to get in at the bottom and get out the top.

Investor Timing

Many experts have said that the timing of individual investors is usually not good. Most investors are emotional with their investment strategies and do not use logic when it comes to investing their money. For example, most people think that when they see bad times in the stock market, more bad times will follow. However, in reality, at this time the market tends to bounce back to where once was. The stock market and mutual funds are cyclical and therefore have always bounced back. 

Professional investors will sell assets once they become popular in the market and buy them when they look like they are not good investments. Professional investors typically do the opposite of what the masses do. Many individual investors will look through a group of mutual funds and pick the one that has been performing the best over the last year. However, the exact same growth will often not be duplicated again in the following year. Therefore, these new investors will not be able to take advantage of the growth of the mutual fund realize.

Mutual Fund Growth

Just because a mutual fund claims a certain amount of growth over a certain period of time, individual investors often do not realize that same amount of growth. They will get in after the growth is very taken place and then sell too early just when the usual fund is about to rebound.

For example, over the last 10 years the average annual rate of return for a municipal bond fund was 4.57%. However, during that same time period, investors only made 2.96%. This is because investors did not choose the proper timing for their investments in municipal bond funds.

What to Do

As an investor, it may seem like there is no easy answer to this problem. If you want to take advantage of timing, it could require a lot of study in how the market works. However, you can typically avoid these problems by investing for the long-term. Purchase securities and hold them for a number of years and the small movements in the market will not affect you has greatly.

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