Timing the markets -- does it work?(ZT)

Q As a long-time investor, I have noticed that September and October are traditionally volatile months for our stock markets. For the past couple of years, I have chosen to remain on the sidelines during this time. Primarily, I hold off making investments or liquidate equities to hold cash or other similar secure investments. Certainly the current news of economic slowdown, possible global recession, burgeoning U.S. debt, weaker consumer confidence and fears of terrorism has done nothing to ease my nervousness about investing during this time. But is this approach the best investment policy? What are the professionals doing? - Umar I. A Trying to time the capital markets to find the opportune time to buy low and sell high is an elusive goal even for professional investors. It takes confidence and often guts to buy when the news is bad and others are selling. Holding cash in anticipation of buying opportunities that are created when markets are volatile can be effective in producing higher positive returns. However, there is a balance to be found when you consider how long you may have funds out of the market earning a relatively low rate of return. At the end of the day, holding too much cash in a portfolio can be a drag on overall total return. Another lesson of history is that stocks make most of their gains in short, dramatic bursts. By the time you realize that things have changed, the stock or fund price may have risen so much that it is now no longer a bargain. Consequently you may pay a large price for being out of the market at the wrong time. Numerous studies support the dramatic effect on portfolio returns by missing the 10 or 30 best days of the market over five-year periods. Market timing fails even the best money managers some of the time, and that is why many advocate buy-and-hold strategies. Many institutional investors believe time in the markets, not timing, leads to long-term investment success. In a well-diversified portfolio, many institutional investors will regularly rebalance their portfolios by investing cash in sectors or securities they hold that are out of favour and down in price. Taking profits out of investments and sectors of the markets that have performed well and redeploying the proceeds to out-of-favour areas or securities will achieve this rebalancing. Alternatively, they will invest new cash in these out-of-favour market areas. Many investors don't have the time and knowledge to successfully market time. Instead, a prudent, time-tested investment strategy of regularly adding to investments through good times and bad leads to non-emotional investing and successful outcomes over time. Bev Moir is a senior investment executive and financial planner with the Moir Team at ScotiaMcLeod, Toronto, member Canadian Investor Protection Fund (CIPF). Visit her website at www.bevmoir.com. To have a question considered for use, write to financial_fitness@ scotiamcleod.com. This article is for information purposes only. Always consult a financial advisor before making decisions based on the advice above. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia.