Going to 100% cash

[traineeinvestor]

Rebalancing is a risk management strategy, It is NOT market timing. For those that believe it is post so on the Bogleheads board...and then duck.

DD

Thanks for the invitation but I'm feeling bruised enough already

A thread from the Bogleheads Forum: Bogleheads :: View topic - Rebalancing = market timing strategy based on tech analysis

So if I sell (say) some or even all of my equities because I feel that they are over priced and the risk at that time outweighs the potential rewards, am I adopting a risk management strategy to preserve my capital or am I market timing?

Bonus question: does it matter?

 

[photoguy]

Agree with Audreyh1 and others that rebalancing to AA is not market timing. The key difference is that market timing is based on a prediction of the future whereas rebalancing completely ignores future expectations.

If 'market timing' means trying to achieve higher returns by purchasing low/selling high, then AA is market timing because this is the goal albeit without making predictions.

The goal of rebalancing is not to maximize returns but rather to maintain a consistent risk profile. You do not need to know whether prices are high or low in order to rebalance.

In fact, I think rebalancing may actually lower returns over long time periods because (1) you lose the momentum effect and (2) with a portfolio of bonds and stocks rebalancing will lead you to a lower stock allocation over time. Since stocks have higher returns on average, rebalancing may lower your portfolio return compared to letting everything just ride.

Consider the bull market of the 90s (or any bull market) where you had multiple years of double digit growth. Rebalancing in this case will lower your returns because you reduce the stock allocation in comparison to letting them grow.

John Bogle argues that rebalancing is just noise (in terms of expected returns):

"We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."

 

[haha]

So if I sell (say) some or even all of my equities because I feel that they are over priced and the risk at that time outweighs the potential rewards, am I adopting a risk management strategy to preserve my capital or am I market timing?

Bonus question: does it matter?

You apparently don't understand. This has nothing to do with efficacy. Market timing, according to this board, is categorically bad.

Ha

 

[NW-Bound]

At the risk of picking at a scab, heck, I am picking at a scab, I am bringing back up the topic of Market Efficiency.

One of the premises of the Market Efficiency is that because there are so many players in the market, all trying to look for values, there is really no good deal to be found. One can just buy the entire market and do well.

Now, I can make the same argument about the Political Efficiency. I think I can claim to invent this term, because I have not heard of it elsewhere. Now, what is Political Efficiency?

My premise is that due to the constant struggle between the conservatives and the liberals, the Dems vs. the Reps, our political system is the best it can be. There is no need for me to vote, really, because my vote does not carry any weight, and does not impact the results any. It really does not matter what my political beliefs are. Independent of my judgements and correspondingly cast votes, the system will seek its own equilibrium point, which is the optimum under the present condition. It's "the wisdom of the crowd" thing.

So, should I not bother to vote in the future? I am seriously considering that. It may be just a waste of my time. I simply cannot vote against the majority, no matter how small its lead is over the minority. I don't know beforehand whether I am in the majority or not before the election outcome, same as the argument that one cannot tell whether the market will go up or down with any certainty.

But there is a difference between the political system and the financial system. One cannot escape from the tyranny of the majority rule. But on the other hand, a person can go against the financial market if he has a reason to believe that it is wrong and he is right. If he feels the market is overvalued, why shouldn't he sell? And if he believes that the market will rise, why should he be afraid to buy?

A voter who turns out to be in the minority after the election outcome cannot opt to be out of the system (I am not talking about people who threatened to leave the country if things do not turn out their way). That minority still has to honor the rules passed by the majority. On the other hand, in the financial market, a person can go against the crowd, and if he turns out to be right, will do very well.

Hence, it is more worthwhile for an individual to tackle the quixotic job of forecasting the market movement than it is to affect where the political system is heading.

I am ready for your flames...

 

[clifp]

I am ready for your flames...

Sorry no flames here, you are basically right.
Other than to point out that our system is not the best that it can be, albeit perhaps the best we should expect.

A better system would be to appoint me an absolute monarch and let me rule.
You could be one of my top advisers.

 

[photoguy]

Market timing, according to this board, is categorically bad.

If market timing worked (i.e., had positive expected returns over buy and hold and the additional transactional/tax costs), I'd be all for it. However, I've seen no objective evidence that is the case.

 

[photoguy]

There is no need for me to vote, really, because my vote does not carry any weight, and does not impact the results any.

This is off topic, but the American political system is extremely well designed from the point of view of your vote determining who the president is going to be.

The electoral collage and winner take all design means that you are far more likely to cast a decisive vote than in a simple majority/popular vote system. Consider the super close Bush-Kerry election where winner came down to who won ohio (which bush carried by only 100,000 votes).

 

[audreyh1]

Wow. Wish Frank was still round. Miss that guy.

Saw him in concert in Austin in 1981. Awesome!!!!

Audrey

 

[audreyh1]

So if I sell (say) some or even all of my equities because I feel that they are over priced and the risk at that time outweighs the potential rewards, am I adopting a risk management strategy to preserve my capital or am I market timing?

Both

Audrey

 

[audreyh1]

John Bogle argues that rebalancing is just noise (in terms of expected returns):

"We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."

Yeah - he kind of forgot about managing short-term volatility. Which is the whole point of rebalancing! It's not about absolute return, it's about risk-adjusted return - how you get a pretty good long-term return with less volatility.

Audrey

 

[traineeinvestor]

At the risk of picking at a scab, heck, I am picking at a scab, I am bringing back up the topic of Market Efficiency.

One of the premises of the Market Efficiency is that because there are so many players in the market, all trying to look for values, there is really no good deal to be found. One can just buy the entire market and do well.

Now, I can make the same argument about the Political Efficiency. I think I can claim to invent this term, because I have not heard of it elsewhere. Now, what is Political Efficiency?

My premise is that due to the constant struggle between the conservatives and the liberals, the Dems vs. the Reps, our political system is the best it can be. There is no need for me to vote, really, because my vote does not carry any weight, and does not impact the results any. It really does not matter what my political beliefs are. Independent of my judgements and correspondingly cast votes, the system will seek its own equilibrium point, which is the optimum under the present condition. It's "the wisdom of the crowd" thing.

So, should I not bother to vote in the future? I am seriously considering that. It may be just a waste of my time. I simply cannot vote against the majority, no matter how small its lead is over the minority. I don't know beforehand whether I am in the majority or not before the election outcome, same as the argument that one cannot tell whether the market will go up or down with any certainty.

But there is a difference between the political system and the financial system. One cannot escape from the tyranny of the majority rule. But on the other hand, a person can go against the financial market if he has a reason to believe that it is wrong and he is right. If he feels the market is overvalued, why shouldn't he sell? And if he believes that the market will rise, why should he be afraid to buy?

A voter who turns out to be in the minority after the election outcome cannot opt to be out of the system (I am not talking about people who threatened to leave the country if things do not turn out their way). That minority still has to honor the rules passed by the majority. On the other hand, in the financial market, a person can go against the crowd, and if he turns out to be right, will do very well.

Hence, it is more worthwhile for an individual to tackle the quixotic job of forecasting the market movement than it is to affect where the political system is heading.

I am ready for your flames...

No flames from me either - I haven't voted in my home country for the last few elections and haven't registered to vote in Hong Kong (even though I became eligible to do so over a decade ago). I simply can't be bothered and continue to hope that Australia's mandatory voting isn't adopted.

On market efficiency, I am something of an agnostic. I accept that it is very difficult and unlikely for an investor to "beat the market" but there are enough anomalies to make me wonder.

 

[okapi]

Oh my God,the European Union is finished,Swine flu.North Korea bombed a South Korean ship.etc.etc.If I listen to the Wall ST. bells and whistles I would be changing my AA every other day.No one seen the subprime coming,Lehman, the crash etc. Experts are a hazard to your financial future.
I love simplicity.I may not beat the market, but i dont get severely beaten by it.

 

[donheff]

All of this talk of market timing is distracting from the real issue - re-balancing to a predetermined AA and "going all cash" based on expectations of where the market will go are worlds apart as investing strategies. What is interesting about this thread are the different approaches to risk and the analyses of the current and future market conditions. In many respects I don't have the luxury of risking market timing because I don't do the analysis that would make me comfortable with choosing when to get out and in. For that reason my opinion (and that of others like me) on which strategy is better is of little interest/value to others. On the other hand, it is interesting to read the thoughts of knowledgeable timers (especially of the all in, all out variety) vs knowledgeable re-balancers in these turbulent times. Unfortunately (or maybe fortunately) I am not retaining all of the interesting info so the discussion won't make a material difference in what I do. but thanks for the entertainment.

 

[samclem]

In many respects I don't have the luxury of risking market timing because I don't do the analysis that would make me comfortable with choosing when to get out and in. For that reason my opinion (and that of others like me) on which strategy is better is of little interest/value to others.

Ah . . . but, the fundamental nugget: do you "not do the analysis" because you don't want to spend the time, because you don't have the skill, because you don't have the resources, or because you believe that it is impossible for anyone to do this analysis and yield a product with sufficient reliability to be useful as a basis for risking your one and only nest egg? I'm in the last category.

 

[ERD50]

You apparently don't understand. This has nothing to do with efficacy. Market timing, according to this board, is categorically bad.

Ha

That's a bit of a broad brush, isn't it? I like photoguy's response:

If market timing worked (i.e., had positive expected returns over buy and hold and the additional transactional/tax costs), I'd be all for it. However, I've seen no objective evidence that is the case.

Though I'll soften that a bit - I have no confidence that I can make it work for myself. Otherwise, I'd be a big fan of market timing and probably telling others how great it is.

-ERD50

 

[donheff]

Ah . . . but, the fundamental nugget: do you "not do the analysis" because you don't want to spend the time, because you don't have the skill, because you don't have the resources, or because you believe that it is impossible for anyone to do this analysis and yield a product with sufficient reliability to be useful as a basis for risking your one and only nest egg? I'm in the last category.

All of the above. But the last category isn't because I have carefully analyzed it. It is because I have read a lot of thoughtful arguments to that effect here and accept them because they fit into my predispositions and reluctance to study.

 

[Ed_The_Gypsy]

in re Frank Zappa:

I seem to remember a Money magazine article many years ago where his widow told how she had discovered CDs and was moving to them exclusively.

 

[HFWR]

in re Frank Zappa:

I seem to remember a Money magazine article many years ago where his widow told how she had discovered CDs and was moving to them exclusively.

I moved to CDs in the mid-80s, but still have some vinyl...

 

[dex]

John Bogle argues that rebalancing is just noise (in terms of expected returns):

"We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."

If a person never rebalanced to a predetermined AA; I would agree it is not market timing.

However, once a person adapts the concept of re-balancing to their AA, it is market timing. It is just another system; like other market timing techniques (moving averages; bollenger bands; Elliot wave - if these are market timing techniques so is AA) that has its rules that tell the person when to buy and sell.

AA and other market timing techniques have the same objectives - make money within the investor's risk/reward tolerances.

That AA re-balancing is perceived as 'mechanical' is no different than other market timing techniques and the rules the investor/technique establishes.

AA re-balancing does try to predict the future based upon past data like other market timing techniques. The selling of the asset class is proof of that (otherwise why do it?). Even establishing a AA is an attempt to predict future performance based upon past data.

Look up Moving Average, Bollenger Bands, MACD, Elliot wave etc and you will find trading rules that attempt to make the investment mechanical.

Bottom line - It is OK to be a Market Timer. You are not a bad person for doing it.

 

[REWahoo]

Can't we all agree to just call it "investing" and move on with our lives?

 

[Leonidas]

Can't we all agree to just call it "investing" and move on with our lives?

Amen.

 

[MichaelB]

This is actually a pretty negative thread. It’s either I’m getting out completely or I’m holding based on methodology and discipline. No positive forward looking views?

It doesn’t have to be gloom and doom. It’s possible that layoffs have been concentrated in the public sector and were accelerated in the may-thru-aug period based on the budget cycle, and will now begin to decline. It’s also possible that private sector hiring has been steady, is slowly increasing, and now wage growth will follow. Housing sales may have hit bottom and are just bumping along but not declining anymore. Banks are now deprived of much of their fee income and may have to get back into old time ending. Finally, household savings has risen substantially – to over 6%, while consumer debt has fallen. This is a very positive development – and is a strongly positive indicator of future growth potential.

Not saying that things are rosy because they’re not. But it’s not doomsday either. I'm keeping my portfolio balanced and looking at how to minimize bond risk going forward.

P.S. I saw Frank Zappa and Jimi Hendrix on my 15th birthday. If my parents had any clue at all about what they were buying they would have locked me in instead.

 

[audreyh1]

If a person never rebalanced to a predetermined AA; I would agree it is not market timing.

However, once a person adapts the concept of re-balancing to their AA, it is market timing. It is just another system; like other market timing techniques (moving averages; bollenger bands; Elliot wave - if these are market timing techniques so is AA) that has its rules that tell the person when to buy and sell.

AA and other market timing techniques have the same objectives - make money within the investor's risk/reward tolerances.

That AA re-balancing is perceived as 'mechanical' is no different than other market timing techniques and the rules the investor/technique establishes.

AA re-balancing does try to predict the future based upon past data like other market timing techniques. The selling of the asset class is proof of that (otherwise why do it?). Even establishing a AA is an attempt to predict future performance based upon past data.

Look up Moving Average, Bollenger Bands, MACD, Elliot wave etc and you will find trading rules that attempt to make the investment mechanical.

Bottom line - It is OK to be a Market Timer. You are not a bad person for doing it.

Nope. Does not equate.

Choosing an asset allocation based on long term historical trends is no more market timing than buy-and-hold is. If you have an asset allocation, you have to rebalance as that is the only way to maintain the allocation. Rebalancing has nothing to do with anticipating near-term future market changes.

The technical analysis techniques attempt to predict near term market changes based on the recent past and rebalancing does not do that.

Choosing a fixed allocation or other fixed investment plan based on long term historical trends is not market timing. ALL investment strategies are based on long-term market trends for various asset classes. Saying that you are going to maintain an allocation of 40% stocks and 60% bonds because over a long historical period that has yielded a performance of X% with volatility of Y with standard deviation of Z is not market timing. It becomes market timing when you change your portfolio in anticipation of near future market changes, when you decide that equities are going down, or interest rates are going up, and changing your allocation - that is market timing. Rebalancing back to your fixed target allocation because your portfolio has become out of balance is not market timing.

It seems like you willfully ignore why a AA portfolio must be rebalanced. It's to maintain the original volatility goal. Rebalancing is "proof" of nothing returning to a target allocation on a regular basis in order to maintain the desired long-term risk profile of the portfolio.

Audrey

P.S. Personally I hold not value judgement on the "goodness" or "badness" of market timing - that is irrelevant to me. I have several on-line buddies who use sophisticated T/A techniques to move in and out of assets in very short order. I just know that I can't do it, so I'm glad I found a simple investment strategy that does not require me to anticipate and react to near term future market trends.

 

[fritz]

This is actually a pretty negative thread. It’s either I’m getting out completely or I’m holding based on methodology and discipline. No positive forward looking views?

It doesn’t have to be gloom and doom. It’s possible that layoffs have been concentrated in the public sector and were accelerated in the may-thru-aug period based on the budget cycle, and will now begin to decline. It’s also possible that private sector hiring has been steady, is slowly increasing, and now wage growth will follow. Housing sales may have hit bottom and are just bumping along but not declining anymore. Banks are now deprived of much of their fee income and may have to get back into old time ending. Finally, household savings has risen substantially – to over 6%, while consumer debt has fallen. This is a very positive development – and is a strongly positive indicator of future growth potential.

Not saying that things are rosy because they’re not. But it’s not doomsday either. I'm keeping my portfolio balanced and looking at how to minimize bond risk going forward.

Here's a little different view. Bob Doll at BlackRock hasn't moved off his 2010 annual forecast yet. As for getting it right - even computer guided Quant funds have so far failed - apparently they are logical, but the market isn't....

 

[audreyh1]

This is actually a pretty negative thread. It’s either I’m getting out completely or I’m holding based on methodology and discipline. No positive forward looking views?

I have to admit my forward looking views are somewhat negative. I tend to believe that we are in one of those long term secular bears and that we won't get out of it until sometime in the second half of this decade.

But I don't think things are currently as bad as the general consensus likes to paint. Many companies are doing very well, and I believe they will continue to do so. I don't really think we will have a "double dip" - i.e. another recession soon - but I feel we are just skirting that scenario. I think unemployment will continue to be very high, and that the US economy will continue to be pretty weak.

But companies are and can continue to be profitable in this environment. [And it's essential to notice that most larger US companies sell world-wide, not just to the US] All of this would be fairly good news for equities, except that the retail investor is so burned right now, that I can't see interest in equities increasing any time soon. So although equities might be better value now than they have been for the past couple of decades, P/E ratios could still continue to contract and remain depressed for a long time. Equity investors investing for capital gains will have to be very patient.

Sorry - that's about as positive as I can get these days.

In the meantime, my personal life has nothing to do with what is happening in the economy, so I am very positive there!

Audrey