Evidence Against Market Timing
Mutual fund flows are published by organizations such as Investment Company Institute and TrimTabs. These show that flows generally track the overall level of the market. For example, in the beginning of the 2000s decade, the largest inflows to stock mutual funds were in early 2000 while the largest outflows were in mid 2002. It is good to note that these mutual fund flows were near the start of a significant bear (downtrending) market and bull (uptrending) market respectively. A similar pattern is repeated near the end of the decade.
This mutual fund flow data seems to indicate that most investors (despite what they may say) actually follow a buy high, sell low strategy. Studies confirm that the general tendency of investors is to buy after a stock or mutual fund price has already increased. This creates a surge in the number of buyers which then drives the price even higher. However, eventually, the supply of buyers becomes exhausted, and the demand (supply and demand) for the stock declines and the stock or fund price also declines.
The famous Dalbar study found that the average investor's return in stocks is much less than the amount that would have been obtained by simply holding an index fund consisting of all stocks contained in the S&P 500 index.
A recent study suggests that corporations and investment banks cannot time the credit markets. They show that investment banks such as Goldman Sachs do as poorly as firms like Ford when it comes to timing the issuance of their bonds.
Read more about this topic: Market Timing
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