This is from Dohmen Capital Research Institute:

"Our primary reason for market or sector timing is to avoid the big declines. But the traditional approach take the defeatist attitude that its just too difficult to sell before the big bear market. Well, the great hedge funds do this all the time…very successfully.

"Look at this example of a major mutual fund, using outside managers who took the old, "long term hold" approach. In 2001 Vanguard U.S. Growth Fund lost 31.7%. The management firm hired to manage the fund had made a major bet on one stock, Cisco, right at the top, just to see it lose 65% of its value in 2001.

"So, the fund company, Vanguard, changed management firms for this fund. The new money management firm, one of the biggest, lost another 36% for the fund in 2002.

"This shows that the traditional fundamental analysis, and the "hold for the long-term" so often preached, are prescriptions for financial ruin.

"Here is an example of how proper timing can produce huge changes in performance.

"I will refer to an example given by economist Gary Shilling, who writes an interesting column in Forbes magazine. Gary researched the 45-year period form January 1946 to June 1991, certainly a long time period. During this time, the Dow Industrials gained at an 11.4% annual rate, compounded quarterly, including dividend reinvestments. In 45.5 years, $1,000 would have turned into $114,5000. That’s a satisfactory gain.

"However, the investor who would have been out of stocks and in T-bills in the 50 strongest months, would have seen his compounded annual return drop to 4.2%.

"But what about being out of the market in the 50 weakest months? Instead of an 11.4% annual return under the "buy-and-hold" approach, the return would have jumped to a huge 19.9%. In other words, your $1,000 would have grown to over $3 million in 45 years, instead of $114,500.

"Suddenly, the "buy-and-hold" approach no longer seems that great. Of course, nothing guarantees that you will catch each and every decline just in time. However, if you can find a technique to often get you out before major plunges, you can dramatically enhance your return.

"Remember, a 50% loss requires a 100% gain just to get back to even. Therefore, avoiding the worst months is more important than catching the best ones.

"And that’s why sector timing is so important to your investment success."