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 Time
pickers, also known as market timers, believe they can
predict the future direction of the market. In their efforts
to time the market, they attempt to invest in stocks when
the market is up and shelter their investments in cash,
Treasury bills or bonds when the market hits a downturn.
The underlying assumption of all forms
of time picking is that the pickers know news or information
not known to millions of other market participants. For
continued success, the picker must have a never-ending
source of information not available to all other traders.
No one can single- handedly possess such incredibly powerful
and immensely valuable information.
Two concepts that support the idea that
timers are unable to pick the right times to invest are
the Random Walk Theory and the Efficient Market Hypothesis.
Time pickers usually charge clients an
annual fee of 2%-3% of the value of their investment portfolios.
These timers are nothing more than highly paid gamblers
who bet with your money. Some investors who time markets
invest in market timing mutual funds, which often produce
high trading costs. This timing strategy also generates
short-term taxable capital gains for existing fund shareholders
due to the liquidation of fund stock positions needed to
pay off departing shareholders. This assumes they make
a gain, which is certainly not guaranteed. Investors can
avoid cost-generating, tax-creating moves made by managers
and shareholders of active mutual funds by remaining fully
invested in index funds at all times, especially mutual
fund companies that restrict their shareholders to those
who understand how the market works. DFA is one firm that
restricts access to their funds. Only large institutional
investors and clients of preapproved investment advisors
are allowed to invest in their funds. You might call it
a group of really smart investors. When investors move
in and out of investments, they also create the possibility
of paying a huge portion of their gains in taxes. For shortterm
gains, taxes can exceed 40% in some states. Even when time
pickers are lucky enough to win, taxes significantly reduce
their return.
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