Successful Market-Timing Mutual Funds

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Investors may want to consider putting 10% or more of their assets into these investments vehicles.

With the markets in turmoil, plenty of investors are frustrated. Stockholders wish they could sell shares before downturns and buy just as bull markets begin. But financial advisors discourage clients from trying to predict market movements. Instead of constantly buying and selling, investors should hold for the long term, advisors say.

For years, studies have shown that efforts to time the markets usually fail. All too often investors panic and sell at market troughs and then buy as stocks are peaking. Studying the performance of investment newsletters, Mark Hulbert, editor of Hulbert Financial Digest, found that 80% of market timers bought at the wrong times.

While most investors should avoid trying to time the markets, there are a few mutual funds with long records for making accurate forecasts. These funds have outdone their competitors by shifting between stocks and fixed income. The best of the market-timing funds seem well-suited for the current bear market. Investors may want to put 10% or more of their assets into a market-timing fund.

A top performer is Value Line Asset Allocation, which has returned 3.0% annually during the past decade, compared with 0.15% for the S&P 500. Portfolio manager Stephen Grant can hold up to 100% of assets in stocks when they seem cheap. But during periods when the market appeared headed for trouble, he has lowered the stock allocation to 40% of assets.

A big fixed-income allocation helped the fund stay in the black during 2000, a year when the S&P 500 lost 9.1%. Hefty fixed-income holdings enabled Value Line to outdo the S&P 500 by six percentage points during the first 10 months of 2008. The fund currently has 31% of assets in fixed income.

Another long-term winner has the unlikely name of Columbia Thermostat. Veteran portfolio manager Ralph Wanger started the fund in 2003, saying that markets seemed headed for a rocky period.

Thermostat uses a purely mechanical system for timing the markets. When the fund started, half of its assets were in stocks and half in bonds. After that, Thermostat automatically increased its allocation to stocks when they fell and became cheaper. When the market rose, the portfolio shifted away from stocks and into bonds. Currently 17% of the fund's assets are in fixed income, which has enabled it to beat the S&P this year.

Some funds periodically dump stocks and shift to cash, but the managers say that they do not make market forecasts. Rather they hold cash because stocks appear overvalued. Whether or not they try to time the markets, several of the funds have been able to protect shareholders from downturns.
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