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    • Index funds track the performance of the market as a whole. They are generally highly automated and thus offer very low fees. Basically, you use them to invest in business as a whole and don't have to worry about the performance of specific companies or even sectors. When the market goes up, they go up; when the market tanks, they do as well, though there might be some small time lags involved. I don't see why market timing would be more successful with index funds than with a diversified equity portfolio, but then I'm certainly no expert. Most financial advisers caution against a market timing strategy because it is simply not reliable unless you own a time machine.

    • So do big dips help you accumulate cheap stock and big spikes keep you from buying too many expensive shares?

      I believe @amacbean is a proponent of dollar cost average investing. Basically, you average your risk over time by investing the same amount each month, say $100. When the market is low, that $100 buys more shares. When the market is high, it buys less. Over the long haul of decades, the theory of dollar cost averaging says that you will end up with a higher valued portfolio than if you invested the $1,200 annual sum all at once.

      Peter Lynch conducted an interesting related study on buying at the peak and holding the stock for the long-term.

      Over the long run, however, market timing doesn't matter much. Lynch conducted a study that examined an investor who invested $1,000 every year at the market's highest point (worst possible time to buy), as well as an investor who invested $1,000 every year at the market's lowest point (best possible time to buy). Over a 30-year period, the difference was quite small -- 11.7% annualized returns versus 10.6%.