In 2011 you can own the best mutual fund in either the stock fund or bond fund department, but without a timing strategy you won’t get the best results. Mutual fund investment strategy is a two part deal consisting of both fund selection and timing. The good news is that mutual fund timing is the easy part.
To keep things simple we’ll talk about fund timing in terms of stock funds vs. bond funds in 2011 and beyond. These are the two basic fund types most people put money into for greater long-term returns. And most of the time either one or the other is the best mutual fund category in any given year. Most people own both for the balance this provides their overall portfolio, and you should too. Let’s say you invest $10,000 in each in 2011. What kind of timing strategy should you employ over the years?
First, you don’t need to find the best mutual fund in either category, and you probably never will. There are thousands to choose from and if you invest in a 401-k, IRA, or with a single fund company your list of choices will be limited. Hence, fund timing is important. Second, to my knowledge no one has ever mastered timing in any arena of investing with a complex formula. Third, most complicated timing strategies work sometimes but not over the long term – and funds are a long term investment.
That said, there is a simple, sensible and best mutual fund timing strategy that has worked over the long term and is likely to work beyond 2011. It’s called BALANCE and REBALANCE. Here’s how it works in our example of $10,000 in a stock fund and $10,000 in a bond fund. A year after you make your original investment we’ll say that your stock fund is worth $12,000 and your bond fund is worth $8000. You broke even with a total portfolio value of $20,000, and if you are like most people you don’t do a thing about it. What you should do: rebalance by taking $2000 from your stock fund and putting it into your bond fund.
That accomplishes two things. First, it puts you back on track with half in each fund. Second, it’s an automatic system of fund timing that always has you buying more shares in a fund when the price (net asset value) is falling; while selling shares in the other when its price goes up. Market timing is all about buying low and selling high. With balance and rebalance you can do this consistently, over the long term. No second-guessing involved. It’s an ongoing process that requires your attention just once a year, and it’s your best mutual fund timing strategy because it works.
In 2011 many 401-k and other retirement plans offer a timing program that is automatically executed for you each year. It’s a feature called “automatic rebalance”. Just sign up for it and your plan does the rest. Even the best mutual fund will have good years and bad years. With the best mutual fund timing strategy you can roll with the punches and make the best of it year after year.