Asset Allocation vs. Market Timing

When it comes to investing one’s assets, there are many schools of thought. Two of the most prominent practices utilized are asset allocation and market timing. Asset allocation is a long term investment strategy that builds a portfolio based upon asset classes while market timing refers to the practice of buying and selling securities based on future market movements. Many investment studies have shown that the allocation of assets will have a greater impact on performance than market timing.

The asset allocation strategy builds a portfolio based upon a variety of investment categories, such as large cap stocks, small cap stocks, long term bonds, utilities, etc. How the assets are ultimately allocated is based upon the investor’s risk tolerance, time horizon and goals for the portfolio.  This strategy has been proven to be the most efficient way in managing one’s assets. Studies have shown that between 91% and 97% of an investor’s performance is dependent upon how the assets are allocated. This strategy also helps an investor avoid losses from timing the market incorrectly and removes some of the emotion involved with portfolio decisions.

Investors who utilize the practice of market timing take on considerably more risk in their portfolio. This strategy is based upon buying and selling securities in a short time period in order to profit from price movements. The problem with market timing is that it is difficult to determine future market prices, especially during periods of high volatility.  Since it has been proven that the vast majority of performance is based upon asset allocation, it does not appear efficient to take on the risk of timing the market, especially since there is always a level of uncertainty.

At Mitlin Financial, we believe a long term investment strategy based upon asset allocation can alleviate the pressures that come about when trading securities on a short term basis. If you have had negative experiences with market timing, please contact Mitlin Financial for a free consultation.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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