Wouldn't it be wonderful if either you or your fund manager could time the market? You'd make a mint, but it's only a dream. Nobody, but nobody, has consistently guessed the direction of the bond or stock market over any meaningful length of time, although many will make the claim. And remember that to be successful, timing requires two calls: When to get out, and when to get back in.
One reason beyond low expense ratios that index funds are tough to beat is that they are always 100% invested in the market—they have no cash holdings—when the market takes off. Index funds always call bull markets correctly and they never miss a rally. Yet, they always fail to call a bear market or correction. However, being right on every bull market, as well as avoiding transaction costs and minimizing taxable distributions, is tough to beat.
Since returns on stock and bond funds have been distinctly positive on average annually since we have started keeping records, being ready for bull markets is more important than avoiding bear markets.
When investing in actively managed stock funds, you should hope for superior stock and industry selection, not market timing. If your actively managed portfolio is building up a large cash balance, in excess of 10% of the portfolio, your manager is either engaging in some subtle market timing or there has been a recent rush of cash into the fund. Either case may ultimately lead to poorer performance. For bond funds, when maturities are significantly shortened or lengthened, the impetus is usually market timing driven by an interest rate forecast.
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