Novice investors are constantly told to never – never! - time the market. Just buy and hold stocks, dollar-cost averaging over time. That is good advice. I know some novice investors who have done very well through various economic cycles, buying stocks in both good and bad times – especially the bad times. They have unshakable faith that the market will always come back. If you didn’t have such faith, you wouldn’t be able to invest in this fashion.
I am a professional investor and have timed the market with some success, but not too much because it is very hard to do. But I think novice investors should attempt to time the market once or twice in their investing careers. Sacrilege, I know. I’m not talking about getting totally in or out of the market, but rather about making changes in asset allocation that have the potential to boost returns substantially over time.
Here is how it works. Imagine you have your money in index funds in a traditional 60/40 portfolio. That means 60% in a stock index fund and 40% in a bond index fund. The moment when you are feeling the most ebullient about your portfolio, when it seems like it’s going up most every day and you can’t believe how much you are making, that is the point at which you want to adjust your stock allocation down to 50%.