Without market timing, then, it's clear that over the short term the market is an inefficient vehicle for making money. The objective of market timing is to reduce the risk or fluctuation in an investment account's value, while achieving higher returns than other investments with similar risk. It does so by seeking to avoid declining markets and to preserve capital so that one has more to invest during rising markets. Many individuals and institutions have chosen to forego the superior performance of the stock market because they are unable or afraid to invest solely for the long term or take the risk of sudden short-term losses. For these investors, market timing offers the opportunity to participate in the market with the goal of reducing risk and increasing risk-adjusted returns.
Risk is the variability of an investment's returns over time.
The lower the standard deviation, the lower the risk. When risk is figured into their returns, studies have shown that timers consistently outperform the market. Another study shows that even if timers missed all the market peak between 1946 and 1991, as long as they also missed the valleys, they would beat the market average. It is this fact that is driving the growth of this investment strategy and the success of professional market timers and the investors they serve. Every serious investor understands why accurate market timing would be a wonderful thing.