Advanced Diploma of Financial Planning (ADFP) Practice Test

Which of the following statements regarding market timing is true?

1. It is a reliable long-term strategy

2. Investors aim to invest during rising markets and exit in falling ones

3. It guarantees positive returns

4. It exclusively applies to bond investments

The correct answer is: Investors aim to invest during rising markets and exit in falling ones

The statement that investors aim to invest during rising markets and exit in falling ones accurately describes the fundamental concept of market timing. Investors who utilize this strategy seek to take advantage of market fluctuations by buying securities when they believe prices are low (during rising markets) and selling them when they anticipate prices will decline (during falling markets). This approach is based on the assumption that an investor can predict market movements—a practice that is generally challenging to execute effectively over the long term. The choice that discusses market timing as a reliable long-term strategy is often misleading since market timing relies on the investor's predictions, which can vary significantly from actual market performance. Similarly, the assertion that market timing guarantees positive returns is incorrect, as there are numerous factors at play that can lead to losses, regardless of timing. Lastly, the notion that market timing exclusively applies to bond investments is inaccurate; it is a strategy applied across various asset classes, including stocks and commodities, not just bonds.