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Market Timing
Old 02-14-2011, 09:58 AM   #1
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Market Timing

I'm developing my plans to invest and manage a lump sum pension, and would appreciate some philosophical input from the brain trust. Generally, I believe that there are technical indicators that if followed responsibly, can improve long term returns in the stock market. There are several schemes out there that are near perfect when backcasted. For clarity, I'm referring to long term trend indicators and not "catching the bottom". I do believe it is impossible to catch the bottom or the top.

My thoughts are to manage an equity allocation within a range. For instance, down to 40% in a bear trend and up to 60% in a bull trend.

I know that many experts dismiss this approach and call for constancy. To me this is because people tend to behave emotionally and many end up buying or selling at the worst possible time.

I'm wondering if many here follow this approach and have had success with it?
BayBum
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Old 02-14-2011, 10:07 AM   #2
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"There are several schemes out there that are near perfect when backcasted."

There's a world of difference between "backcasting" (or resubstitution error) and performance in the future (generalization error). Using backcasting as an estimate of future returns is subject to all sorts of bias including multiple hypothesis testing (try a bunch of ideas until you find one that works historically -- the only problem is it works by chance not because of some inherent behavior in the domain).
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Old 02-14-2011, 10:15 AM   #3
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BayBum,

I'm not smart enough to try to time the market. Many others more brilliant than I have failed miserably and nobody has done it consistently over the years. I do suggest you check out the Bogleheads forum on investing advice. Some of the best around. And if you are interested in different "timing" strategies, suggest the Thrift Savings Plan forums. They have some advice and newsletter subscriptions fthat are pretty interesting.
http://www.bogleheads.org/forum/index.php
TSP - Thrift Savings Plan
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Old 02-14-2011, 10:16 AM   #4
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BayBum, congrats on what sounds like your impending retirement. Investing-wise, I believe you are on a very fruitless and expensive path. Good luck.
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Old 02-14-2011, 10:17 AM   #5
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I don't follow technical indicators but will sometimes increase my equity position when there is a significant drop in the market -- went to approx. 90% equities during the most recent plunge but now back to around 45%. Didn't catch the bottom but worked very well buying on the way down. If the market continues up, will likely reduce equity allocation a little more. I do have a pension which makes it a bit easier to move more to stocks when it appears the world is ending.
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Old 02-14-2011, 11:00 AM   #6
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Expenses might be bad if you are making large swings in allocation. But try it for a few years and see how you like it. I raise cash when my portfolio is above my retirement expectations and reinvest when the market is down. Pretty mechanical, but very helpful through 2008/2009.
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Old 02-14-2011, 11:06 AM   #7
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I'm wondering if many here follow this approach and have had success with it?
Yes, back around 1980 when interest rates were much higher than historic rates, my wife and I bought some long term deep discount bonds, and they did quite well over the next decade. I didn't catch the top of the interest rate curve, but came within a year or so. Around the end of 2008 when I started to see news stories about troubles in the stock market (I don't follow financial news), I started a new common stock IRA for myself. I was several months away from catching the low point, but I still did well. I think it makes good sense to take broad, large scale trends into account in personal investing. Like now, when interest rates are low.
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Old 02-14-2011, 01:14 PM   #8
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Originally Posted by BayBum View Post
My thoughts are to manage an equity allocation within a range. For instance, down to 40% in a bear trend and up to 60% in a bull trend.

I know that many experts dismiss this approach and call for constancy. To me this is because people tend to behave emotionally and many end up buying or selling at the worst possible time.
BayBum
I agree with your sentiment, but haven't found a strategy... or evidence of a strategy yet... so am very interested if you do. One of my main concerns is that I am not convinced that there exists such a strategy - otherwise why would presumably among the best money managers in the world: Harvard, Stanford, Yale guys lose so much over the last bear?

Thus, I think another reason that we are counselled to buy-rebalance is that it is: just plain difficult to get the timing right in practice:there is a fundamental trade-off in sensitivity of signals ie multiple exits/entries or miss the last 50% of the bull vs , missing the first big chunk in a bear.

Are we 40% up this bull... or 80%... or 100% - makes a huge difference to returns?

You may be interested in this from the Vanguard site (sorry - not sure a direct URL will work)
Portfolio Construction: A primer on tactical asset allocation strategy evaluation

I think it is a lot easier for a strategy to be "right" on one side than on both (e.g. my friend knew crash was coming... pulled out before crash... but he has been predominantly cash since then) :-)
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Old 02-14-2011, 02:05 PM   #9
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I think it is a lot easier for a strategy to be "right" on one side than on both (e.g. my friend knew crash was coming... pulled out before crash...
It's relatively more difficult to tell when a crash is coming than it is to tell when a crash has happened.
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Old 02-14-2011, 02:32 PM   #10
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I think the difficult part of such a strategy is to identify when the situation truely is a trend vs what seems to be a trend. Take this moment for example. I don't even think the experts can say are we in a bull or bear market.
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Old 02-14-2011, 02:42 PM   #11
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For instance, down to 40% in a bear trend and up to 60% in a bull trend.
Do I understand correctly that your plan is to increase your stock allocation in a rising market and decrease it in a declining one? That sounds precisely backwards, at least from a valuation perspective.

I understand that whatever technical indicators you're going to be looking at are supposed to be predictive, but all the technical indicators I've seen say something along the lines of "stocks will continue going up, until they don't" - which isn't very helpful.

I actually come at the whole retirement investing thing from a bit of a different perspective. While increasing returns would be great, that isn't the primary objective. I've already left my job with a plan that I believe will be successful. What I'm trying to do now is not necessarily increase returns, but mitigate the downside. When my portfolio grows relative to my needs, I can take risk off the table. For example, if I start with a 4% withdrawal strategy my investment hurdle rate is 4% real. But if my portfolio grows 33%, my hurdle rate declines to 3%. I shouldn't need to take as much risk to achieve my hurdle. Said another way, my equity allocation declines in a "bull trend" market. I'm not concerned about trying to eek out the most from this bull. I'm more concerned about storing nuts for the winter, which will eventually follow. When winter comes, I may "time the market" by increasing my equity allocation, but I won't need to.
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Old 02-14-2011, 03:23 PM   #12
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You've come to the right forum to get all the market timing tips you need. Our own market timing guru Dex is absolutely awesome. He posts his thoughts not very often, but every now and then he gives us a morsel and predicts the future of the market. You need to watch for his posts and digest every word of his prognostications. Then (and this is the real value of following a guru) you need to do exactly the opposite of what he suggests.

Good luck!
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Old 02-14-2011, 03:23 PM   #13
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Originally Posted by BayBum View Post
My thoughts are to manage an equity allocation within a range. For instance, down to 40% in a bear trend and up to 60% in a bull trend.

I know that many experts dismiss this approach and call for constancy. To me this is because people tend to behave emotionally and many end up buying or selling at the worst possible time.

I'm wondering if many here follow this approach and have had success with it?
BayBum
Almost all of us did. That is how we got so rich and retired to a luxury life of Costco and WalMart shopping for food, Salvation Army and Value Village for clothes.

Come on down, BayBum, we happy as pigs in muck.

Ha
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Old 02-14-2011, 03:38 PM   #14
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I think the difficult part of such a strategy is to identify when the situation truely is a trend vs what seems to be a trend. Take this moment for example. I don't even think the experts can say are we in a bull or bear market.
i don't know, call me crazy, but seeing how the markets are up what 85%, 90% off the march 9, 2009 low i'd say it's a pretty reasonable guess to say this is a bull market.
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Old 02-14-2011, 04:27 PM   #15
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I'm not concerned about trying to eek out the most from this bull. I'm more concerned about storing nuts for the winter, which will eventually follow.
I don't understand that. The more you eek out from the bull, the more nuts you can store for the winter. Or, i.e., there's no difference between bad money that you get through risk and good money that you get through safer dividends or interest. It's all just money.
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Old 02-14-2011, 04:30 PM   #16
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seeing how the markets are up what 85%, 90% off the march 9, 2009 low i'd say it's a pretty reasonable guess to say this is a bull market.
It has been a bull market. And it's only after the fact that you know it. There's no investable information in past market actions.
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Old 02-14-2011, 05:20 PM   #17
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Almost all of us did. That is how we got so rich and retired to a luxury life of Costco and WalMart shopping for food, Salvation Army and Value Village for clothes.

Come on down, BayBum, we happy as pigs in muck.

Ha
Close, but no cigar. I buy clothes at Costco, too.

Actually, I have a proprietary technical indicator that works perfectly, but only for the Venezuelan beaver cheese futures market.
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Old 02-14-2011, 05:54 PM   #18
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Lately, I've been selling. Even though the market may still move up. There is no way I want to experience the deer-in-the-headlights feeling of late 2008 and early 2009 again, not if I can help it. It seems to me good to have a multi-year stash of money you know you will need while the markets do their usual strangeness (and take many people's money).
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Old 02-14-2011, 06:18 PM   #19
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Lately, I've been selling. Even though the market may still move up. There is no way I want to experience the deer-in-the-headlights feeling of late 2008 and early 2009 again, not if I can help it. It seems to me good to have a multi-year stash of money you know you will need while the markets do their usual strangeness (and take many people's money).
Me too- I sold a couple hundered thousand of stock, and only partially replaced it with other stocks that I considered better priced. I still have more equities than fixed though, which may not be very bright.

Ha
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Old 02-14-2011, 06:20 PM   #20
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i don't know, call me crazy, but seeing how the markets are up what 85%, 90% off the march 9, 2009 low i'd say it's a pretty reasonable guess to say this is a bull market.

Perhaps. But, if you look at the timeframe from the last 5 years. The market doesn't look so bullish, but is with peaks and valleys. That's the difficulty of trying to time the market. Maybe now is a high-point or just a point to a much larger bull run. One really doesn't know til after-the-fact.

Say, a year or two from now, can anyone really confidently say where the market will be? It's fun to speculate. But too many variables for my money


http://www.investopedia.com/ask/answers/03/060203.asp
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