Market timing — especially when it leads to frequent trading — can have adverse consequences, such as increased taxes and commissions.
You should carefully weigh these costs with your risk of staying fully invested.
Sprout Capital uses a few versions of limited, systematic market timing. This is more about “positioning” than “prediction”.
- Trend-following. Sprout Capital uses long-term ‘trend-following’ to avoid bear markets and decrease downside risk, without sacrificing broad-market type returns.
- Momentum. Often referred to as the ‘premier market anomaly’, momentum has been shown by both academics and practitioners alike to improve returns and decrease risk, depending on how it is used.
While market timing can decrease risk, it also changes how and when positive returns are achieved, compared to a buy-and-hold portfolio. There will be periods when a portfolio with market timing underperforms a buy-and-hold, broad stock market portfolio, so one should always compare long periods of performance between strategies to completely understand costs and benefits.
Sprout Capital backtests its strategies. Strategies that are backtested and robust to statistical flaws can help decrease downside risk. Decreased downside risk means decreased volatility — and more importantly — decreased peak-to-valley loss.