Market timing with your mutual funds

When investing in bonds, stocks, or mutual funds, investors have the opportunity to increase their rate of return by timing the market - investing when stock markets go up and selling before they decline. A good investor can either time the market prudently, select a good investment, or employ a combination of both to increase his or her rate of return. However, any attempt to increase your rate of return by timing the market entails higher risk. Investors who actively try to time the market should realize that sometimes the unexpected does happen and they could lose money or forgo an excellent return.

Timing the market is difficult. To be successful, you have to make two investment decisions correctly: one to sell and one to buy. If you get either wrong in the short term you are out of luck. In addition, investors should realize that:

1. Stock markets go up more often than they go down.

2. When stock markets decline they tend to decline very quickly. That is, short-term losses are more severe than short-term gains.

3. The bulk of the gains posted by the stock market are posted in a very short time. In short, if you miss one or two good days in the stock market you will forgo the bulk of the gains.

Not many investors are good timers. "The Portable Pension Fiduciary," by John H. Ilkiw, noted the results of a comprehensive study of institutional investors, such as mutual fund and pension fund managers. The study concluded that the median money manager added some value by selecting investments that outperform the market. The best money managers added more than 2 percent per year due to stock selection. However the median money manager lost value by timing the market. Thus, investors should realize that marketing timing can add value but that there are better strategies that increase returns over the long term, incur less risk, and have a higher probability of success.

One of the reasons why it is so difficult to time correctly is due to the difficulty of removing emotion from your investment decision. Investors who invest on emotion tend to overreact: they invest when prices are high and sell when prices are low. Professional money managers, who can remove emotion from their investment decisions, can add value by timing their investments correctly, but the bulk of their excess rates of return are still generated through security selection and other investment strategies. Investors who want to increase their rate of return through market timing should consider a good Tactical Asset Allocation fund. These funds aim to add value by changing the investment mix between cash, bonds, and stocks following strict protocols and models, rather than emotion-based market timing.

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About the author: Tony Reed is the author of " Market timing with your mutual funds", visit his website Stock Basics & Stock Investing for more information.

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Mutual Funds - An Introduction And Brief History

Each one of us does not have the expertise or the time to build and manage an investment portfolio. There is an excellent alternative available – mutual funds.

A mutual fund is an investment intermediary by which people can pool their money and invest it according to a predetermined objective.

Each investor of the mutual fund gets a share of the pool proportionate to the initial investment that he makes. The capital of the mutual fund is divided into shares or units and investors get a number of units proportionate to their investment.

The investment objective of the mutual fund is always decided beforehand. Mutual funds invest in bonds, stocks, money-market instruments, real estate, commodities or other investments or many times a combination of any of these.

The details regarding the funds’ policies, objectives, charges, services etc are all available in the fund’s prospectus and every investor should go through the prospectus before investing in a mutual fund.

The investment decisions for the pool capital are made by a fund manager (or managers). The fund manager decides what securities are to be bought and in what quantity.

The value of units changes with change in aggregate value of the investments made by the mutual fund.

The value of each share or unit of the mutual fund is called NAV (Net Asset Value).

Different funds have different risk – reward profile. A mutual fund that invests in stocks is a greater risk investment than a mutual fund that invests in government bonds. The value of stocks can go down resulting in a loss for the investor, but money invested in bonds is safe (unless the Government defaults – which is rare.) At the same time the greater risk in stocks also presents an opportunity for higher returns. Stocks can go up to any limit, but returns from government bonds are limited to the interest rate offered by the government.

History of Mutual Funds:

The first “pooling of money” for investments was done in 1774. After the 1772-1773 financial crisis, a Dutch merchant Adriaan van Ketwich invited investors to come together to form an investment trust. The goal of the trust was to lo

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What Are Money Market Funds?

Mutual funds that invest in short-term debt instruments are called as the money funds, and markets that deal with such funds are known as the Money Market Funds. These funds provide the benefit of pooled investments, since investors then are able to participate in a more diverse and high-quality portfolio than they otherwise would have individually.

Similar to the other mutual funds, each investor who invests in the Funds is considered to be a shareholder of the investment pool, which is a part-proprietor of the Funds.

The Funds are the wholesale markets in money and also the short-term securities where banks and other financial institutions invest keeping the short-term surpluses in mind.

The Money Market Funds provide other investors, like for example consumers, companies and the non-financial institutions, which have access to this market. The Money from the investors is pooled together to form superior deposits which will draw higher rates of interest and also wherever relevant competitive rates of foreign exchange too.

These Funds deposits are then invested element within the money market. Each investor will have possession of a number of shares within the fund, the value of which will depend upon the share's price. The primary objective of the Funds is to maintain principal value while providing a competitive market return to the investor.

Money Market Funds can be classified into two main types: The first on as Accumulating and the second one as Distributing. The Accumulating Funds mean that the share price increases daily as the interest gets added.

This also can be termed as income or say the interest being 'rolled up' within the share price rather than being paid out. If an investor wanted their interest to be paid out, the Distributing Funds would provide this. In this specialized sort of fund, periodically the interest is paid out; maybe say on a daily basis, while the share price remains stable.

The History Of Money Market Funds?

These Funds are a reasonably used concept feature within the UK but countenance within the US, where these funds were first marketed; they are over 25 years old. The demand for These Funds has mushroomed from small beginnings so much so that the last year's net inflows amounted to almost a rough estimate of US$235 billion.

This was an increase of more than double the previous year's inflows. The total amount currently invested in Funds element within the US is more than US$1.4 trillion. Some would wish to know about the status in Europe? Well, the French lead the way with Spain and Luxembourg behind them.

Although these country's total assets held within the Money Market Funds are still only a fraction of the total held trait within the US.

It was later realized that a diversified spread of investments reduced the customers chances of a major loss and rather than utilize a large number of individual banks, this would be achieved by the use of one particular type of Funds.

The cost of using Money Market Funds:

Most managers involved in these funds charge an annual management fee. These fees vary between company to company, but usually the annual management fee is an "all-in" fee of between 8 and 25 Basis Points resting on the daily outstanding balances held within the Money Market Funds.

After a breathtaking rise in the U.S. interest rates, the Funds are back in business as the front-runners in the U.S. money funds, which move in tandem with the Federal Reserve's target interest rate.

There has been a dramatic change from the recent past months, when money funds were offering a historic low yield of 0.52 percent - and the yield-starved investors has started withdrawing billions of dollars in search of higher returns.

Money Market Funds are profoundly used by millions of Americans but obtain relatively little attention because they are safe and predictable. Their portfolios are made up of short-term securities and are structured to keep the share price stable while paying out interest at the Funds market rates.

They are many customers who swear by it and point out that no individual had ever lost money in such a fund, although they are uninsured. Easy access to your cash is another feature, by wire or telephone, often on the excellent same day.

Many clients typically keep about 5 percent of their assets in a money fund, often as a parking place while awaiting an investment chance, while others use them for income, taking monthly distributions, review writing, typically for amounts above $250, is one of their best known benefits, in the Money Market Funds making them sort of a hybrid checking-savings account.

They are also recommended as a safe place to park cash, away from the risks of the stock and bond markets, when anticipating a major acquisition, like a home, within a year.

Since Money Market Funds are no-load, the difference in yields depends on the costs, typically an average of 0.5 percent. In Funds, a top performer charges only 0.30 percent and was reportedly already yielding 3.12 percent, compared with an average trait within the market of 2.79 percent.

Whatever the percentage ratio might be but we can conclude that the Returns are smaller on other types of money funds, but they appeal to sure investors with other priorities in the Money Market Funds. The security-minded can favor super-safe versions that own only lower-yielding U.S. Treasury securities.

Nontaxable funds have smaller yields but are popular with people in high tax brackets. Thus, investing in the Money Market Funds is really worth the decision.

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Article Source: http://ezarticles.net

William Smith the author provides much more financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Money Market Funds (All is Free)

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