Timing Risk

AAA

DEFINITION of 'Timing Risk'

The risk that an investor takes when trying to buy or sell a stock based on future price predictions. Timing risk explains the potential for missing out on beneficial movements in price due to an error in timing. This could cause harm to the value of an investor's portfolio because of purchasing too high or selling too low.

INVESTOPEDIA EXPLAINS 'Timing Risk'

There is some debate as the feasibility of timing. Some say that it's impossible to consistently time the market; others say that market timing is the key to above average returns. A common thought on this subject is that it is better to have "time in the market," than trying to "time the market." This is evidenced by the growth of all financial markets over the long-run, and that many active managers fail to beat the market averages after transaction costs are counted in.

For example, if you take your money out of a stock because of a predicted downturn, you risk the chance of the stock increasing in price before you buy back in.

RELATED TERMS
  1. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  2. Risk Management

    The process of identification, analysis and either acceptance ...
  3. Market Timing

    1. The act of attempting to predict the future direction of the ...
  4. Liquidity Risk

    The risk stemming from the lack of marketability of an investment ...
  5. Risk Averse

    A description of an investor who, when faced with two investments ...
  6. Certainty Equivalent

    A guaranteed return that someone would accept, rather than taking ...
RELATED FAQS
  1. What is affected by the interest rate risk?

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly ... Read Full Answer >>
  2. How can derivatives be used for risk management?

    Derivatives could be used in risk management by hedging a position to protect against the risk of an adverse move in an asset. ... Read Full Answer >>
  3. Will technology ever disrupt the role of the custodian bank?

    Custodian banks, along with other financial institutions that hold custodian accounts, are likely to be disrupted but not ... Read Full Answer >>
  4. How does duration impact bond funds?

    Duration measures the sensitivity of bond funds to changes in interest rates. A higher duration means that the fund has a ... Read Full Answer >>
  5. What percent of capital should banks hold relative to its risk weighted assets?

    As of 2015, banks are required to hold 4.5% of common equity of risk-weighted assets under the provisions of the Basel III ... Read Full Answer >>
  6. How are risk weighted assets used to calculate the solvency ratio in regulatory capital ...

    Risk-weighted assets are the denominator in the calculation to determine the solvency ratio under the provisions of the Basel ... Read Full Answer >>
Related Articles
  1. Active Trading

    Would You Profit As A Day Trader?

    Market timing is surrounded by controversy, but does it work?
  2. Bonds & Fixed Income

    Achieving Better Returns In Your Portfolio

    We look at three risk factors that best explain the bulk of equity performance.
  3. Markets

    The Uses And Limits Of Volatility

    Check out how the assumptions of theoretical risk models compare to actual market performance.
  4. Forex Education

    Trading Is Timing

    Learn how to make gains even if you don't get in at the right time.
  5. Options & Futures

    Calculating The Equity Risk Premium

    See the model in action with real data and evaluate whether its assumptions are valid.
  6. Fundamental Analysis

    The Equity-Risk Premium: More Risk For Higher Returns

    Learn how the expected extra return on stocks is measured and why academic studies usually estimate a low premium.
  7. Active Trading

    Market Cycles: The Key To Maximum Returns

    You need to understand the various phases of the market cycle to avoid bubbles and make the best investments.
  8. Charts & Patterns

    Market Reversals And How To Spot Them

    The sushi-roll indicator may help lower the risk of trying to pick market tops and bottoms.
  9. Active Trading

    Market Timing Fails As A Money Maker

    This strategy is popular, but can you do it successfully?
  10. Trading Strategies

    When To Follow The Crowd And When To Lose It

    Our profits ultimately depend on the misfortune of other market players.

You May Also Like

Hot Definitions
  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  2. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  3. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  4. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  5. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  6. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
Trading Center