Market timing

According to wikipedia: Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. I would not competely agree with that definition as you do not need to predict market. I see market timing as a tool to reduce risk in portfolio - as a money management strategy.

There are number of articles which says it it not worth to engage in market timing, because if you miss just 10 best days your performance is absolutely crippled. But they forgot to mention, those best days are at the times when market is very volatile and you have also most of the worst days.

So lets try to ask - what will happen if we are looking on market timing as a protection tool not as a performance boost tool? We want to miss that 10 worst day in market. The big picture blog has great article showing what will happen. Market timing is tool how to miss most of the worst days and protect portfolio during those bear markets. Not to enhance your performance.

Mebane Faber has also two great articles regarding market timing and missing 10 best/worst days on his blog which i recommend to read:
http://www.mebanefaber.com/2009/04/03/where-the-black-swans-lie/
http://www.mebanefaber.com/2008/03/27/noise-the-10-best-days/

Worst days and best days are usually clustered together during bear markets when volatility spikes. There is lot of ways how to distiguish between bear and bull markets. The easiest one is to use for example simple moving average technical invdicator.

What we need to do is to move our portfolio to safer instruments during those bear markets. This will bring our performance down but will bring down also our risk. And our risk is cut down by bigger amount then our performance. And this is what matters. Market timing is therefore great tool for risk protection which is worth to use in our portfolio formation.