What is 'Timing Risk'

Timing risk is the speculation that an investor enters into 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 resulting from purchasing too high or selling too low.


There is some debate about the feasibility of timing. Some say that it's impossible to time the market consistently; others say that market timing is the key to above-average returns. A prevailing thought on this subject is that it is better to have "time in the market" than trying to "time the market." The growth of financial markets over time supports this, as does the fact that many active managers fail to beat market averages after factoring in transaction costs.

For example, an investor is exposed to timing risk if he expects a market correction and decides to liquidate his entire portfolio in the hope of repurchasing the stocks back at a lower price. The investor risks the chance of the stocks increasing before he buys back in.

Timing Risk and Performance

A study analyzing investor behavior found that, during the October 2014 downturn, one in five investors reduced exposure to stocks, exchange-traded funds (ETFs) and mutual funds, and roughly 1% of investors reduced their portfolios by 90% or more.

Further analysis found that investors who sold the majority of their portfolios had substantially underperformed the investors who took little or no action during the correction. The investors who sold 90% of their holdings realized a trailing 12-month return of -19.3% as of August 2015. Investors who took little or no action returned -3.7% over the same period. (For more, see: Market Timing Fails As A Money Maker.)

Timing Risk Implications

  • Higher Trading Expenses: Investors who are continually trying to time the market are buying and selling more frequently, which increases their fees and commission charges. If an investor makes a bad market timing call, additional trading expenses compound poor returns.                                                                                                                                                                                                      
  • Additional Tax Expenses: Each time a stock is bought or sold, a taxable event occurs. If an investor is holding a profitable position in a stock and sells it with the intention of buying in again at a lower price, he must treat the capital gain as regular income if the two transactions occurred within a 12-month period. If the investor holds the position for over 12 months, he gets taxed at a lower capital gains tax rate. (For further reading, see: Capital Gains Tax 101.)
  1. Price Risk

    Price risk is the risk of a decline in the value of a security ...
  2. Risk Management

    Risk management occurs anytime an investor or fund manager analyzes ...
  3. Company Risk

    Company risk is the financial uncertainty faced by an investor ...
  4. Capital Gains Exposure - CGE

    Capital gains exposure is an assessment of the extent to which ...
  5. Speculative Stock

    A speculative stock is a stock with a high degree of risk, such ...
  6. Accepting Risk

    Accepting risk occurs when a business acknowledges that the potential ...
Related Articles
  1. Investing

    7 Simple Strategies for Growing Your Portfolio

    There are many ways to grow the value of a portfolio. These seven tried-and-true methods to increase returns have been used by investors of all stripes.
  2. Investing

    Capital Gains Strategies for High Returns

    Investors who have made significant gains face potential tax liabilities when they sell. Here are some strategies to reduce taxes.
  3. Investing

    Understand Risk Before You Diversify

    Before investors can use diversification to maximize investment returns, they need to understand unsystematic risk and systematic risk.
  4. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  5. Investing

    Understanding Risk is Key to Your Investing Strategy

    Here's why considering all types of risk is crucial for a successful investment plan.
  6. Investing

    How to Construct a High-Risk Portfolio

    A high-risk portfolio requires finesse and knowledge, but it can produce above-average returns.
  7. Investing

    Using ETFs For Small Periodic Investments

    ETFs have lower costs than index funds, but the cost to buy and sell can be more expensive.
  8. Investing

    3 Ways to Prepare for a Market Downturn

    No one knows when a market downturn will occur or how long it will last, so it pays to be prepared.
  9. Investing

    Why Average Investors Can't Make Money (XOP)

    Average Investors are dramatically underperforming the market. Here's a look at how they can fix those mistakes and make a decent return
  10. Retirement

    Save More for Your Retirement by Managing Risks

    To fund your lifestyle in retirement you need to balance your risk capacity and tolerance.
Trading Center