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Market timing can contribute to investor mistakes
Concerned about volatility in your equity portfolio? Trying to time the markets probably isn’t the answer. Data from Morningstar shows that, on average, investor returns lag fund returns. A fund’s investor return includes the impact of purchases and sales of the fund. The difference between the two return measures is considered a proxy for investors’ ability to time markets. Investor returns lag because many investors chase past performance and end up buying funds too late or selling too soon. This effect is amplified in higher volatility funds, which are more prone to periods of sharp declines that could cause investors to sell prematurely and miss a subsequent rebound. Investors should consider a more disciplined, long-term approach to investing and avoid jumping from fund to fund, especially when faced with higher volatility.
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