Market Timing

[MN317]

An interesting overview of market timing.... and its many flaws.

Calling the Turns: Why Market Timing Is So Hard

 

[redhead50]

Thanks: most useful for me

From that article's endnotes:

According to the SPIVA Scorecard compiled by S&P Dow Jones Indices, for periods ended December 31, 2014, 76.25% of actively managed U.S. large-cap equity funds underperformed the S&P 500 for 3 years, 88.65% for 5 years, and 82.07% for 10 years.

 

[Chris M]

It's not merely that active fund managers, as a group, can't predict market turning points. The lower (or higher) the market goes, the more convinced they become that the turning point is nowhere in sight. They are least likely to think the market has bottomed when the market bottoms, and least likely to think it has topped when the market tops. Burton Malkiel presented the evidence of this in A Random Walk Down Wall Street. In that classic book, he looked at stock fund managers allocation to cash as evidence for or against their ability to time the market. He found that cash allocations were highest at the past market bottoms of 1970, 1974, 1982, 1987, 1990, 1994 (just before the dot-com bubble began), and 2002. In all these cases, fund managers cash allocations should have been lowest, not highest, in anticipation of the recovery rallies about to begin. He found the opposite for market tops--low cash allocations, when cash allocations should have been high in anticipation of the coming market crashes.


If you think about it, it's not surprising that fund managers are terrible at timing changes in the market's direction. In fact, it has to be this way. Fund managers and other institutional investors are the market, in that they account for the vast majority of the market's trading volume. And the market cannot time itself. The market is a mechanism for pricing expectations about the future. When the market bottoms, prices--and expectations about the future--reach their lowest point. Fund managers who sell their stocks and raise their allocation to cash in market troughs are simply reflecting the market's consensus opinion about the future. As a group they must reflect this opinion, because they are the market. At the exact moment when the market is about to rally, the professionals who comprise the market peer into their crystal balls and conclude that the future looks even bleaker than it did a month ago, a week ago, and a day ago. They then bid down the prices of stocks to the lowest level they will reach. The money they raise selling their stocks goes to cash investments--hence the high allocations to cash Malkiel has observed at market bottoms. The same process happens in reverse, when the market reaches a top. The market cannot time itself; the pros that comprise the market are inevitably completely wrong in their future expectations at market tops and bottoms.


It follows that there can never be a successful market timing strategy that isn't also completely secret and known to only a few people. If a strategy that could, say, predict a market bottom 10 days in advance were to actually become widely known, then everyone would act on it, and market bottoms would simply move so that they occurred 10 days sooner than they used to occur. So if anyone reading this actually figures out a successful market timing strategy, don't tell anyone (except me--I will keep your secret )!

 

[mathjak107]

From that article's endnotes:

According to the SPIVA Scorecard compiled by S&P Dow Jones Indices, for periods ended December 31, 2014, 76.25% of actively managed U.S. large-cap equity funds underperformed the S&P 500 for 3 years, 88.65% for 5 years, and 82.07% for 10 years.

under performing funds though have little to do with under performing those same percentages as investors.

there are thousands of funds with little investor money out there , most are funds few even heard of. many are at the top one year and the bottom the next , but there is that core in the middle that hold most of investors money that do quite well.

when you follow the money you get a very different story.

i would guess and say 80% of investor money is in 20% of the funds . most of those mega funds have done quite well beating their benchmarks over most of the time frames.

all one has to do is follow the money and the odds of beating indexing goes up by a lot .

Fidelity beat benchmarks by $35 billion, but does anyone care? | Reuters

 

[rayinpenn]

Trying to time the market is a fools game...I buy index and dividend ETFs and let the market do what it will. I don't sell I buy as I have no desire to watch my investments hourly. Way too stressful and likely unnecessary and ineffective.

http://www.transparentinvesting.com/uploads/wholestory.pdf

Sent from my iPad using Early Retirement Forum

 

[ERD50]

under performing funds though have little to do with under performing those same percentages as investors.

there are thousands of funds with little investor money out there , most are funds few even heard of. many are at the top one year and the bottom the next , but there is that core in the middle that hold most of investors money that do quite well.

when you follow the money you get a very different story.

i would guess and say 80% of investor money is in 20% of the funds . most of those mega funds have done quite well beating their benchmarks over most of the time frames.

all one has to do is follow the money and the odds of beating indexing goes up by a lot .

Fidelity beat benchmarks by $35 billion, but does anyone care? | Reuters

I looked at the Fidelity Low Priced Stock fund he uses as an example in that article. For the most recent 5 years, it has tracked SPY in total return almost exactly. Not sure you can trade on this advice w/o a time machine.

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-ERD50

 

[Lsbcal]

ERD50, you might want to use Vmvix, mid value fund, as the benchmark.

 

[ERD50]

ERD50, you might want to use Vmvix, mid value fund, as the benchmark.

Perhaps that is more technically correct, but for me personally, the S&P 500 is my 'go-to' investment, so I benchmark against that.

But I was curious, so I ran it, and VMVIX outperforms their active FLPSX, but generally track pretty well - (5 year time frame again):

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-ERD50

 

[imoldernu]

Interesting discussion today... Mar 6. between Yellen and Lagarde, re market stability.

UPDATE 2-Yellen cites 'potential dangers' in U.S. stock valuations | Reuters

 

[unclemick]

60/40 full auto AND keep yer dang finger off the trigger! Let those non emotional computers re balance.



May the force be with you. Stay the course. Hurry up just stand there. Revision to the mean.

You can add the sources of the above quotes later. Hint - it's a test.

heh heh heh - Now in my case with hindsight back to 1966 it is amazing how something so simple was so hard to do.

 

[hnzw_rui]

60/40 full auto AND keep yer dang finger off the trigger! Let those non emotional computers re balance.

Maybe I just haven't found it but does Vanguard have an auto-rebalance option? Currently invested in the Target Retirement funds right now because all I need to do there is set up auto deposit in time with my paycheck.

 

[Evie]

I haven't seen a way to auto-balance. I'd be curious about this as well. I know I should do it, but I don't think I ever have! I'm primarily in Vanguard index funds, so haven't given it much thought.


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[REWahoo]

Maybe I just haven't found it but does Vanguard have an auto-rebalance option? Currently invested in the Target Retirement funds right now because all I need to do there is set up auto deposit in time with my paycheck.

Yes, and you are using it. Any of their balanced funds, including Target Retirement, is auto-rebalanced.

 

[REWahoo]

I haven't seen a way to auto-balance. I'd be curious about this as well. I know I should do it, but I don't think I ever have! I'm primarily in Vanguard index funds, so haven't given it much thought.

You might want to check out the Vanguard Balanced Index Fund.

 

[hnzw_rui]

You might want to check out the Vanguard Balanced Index Fund.

That's a straight up 60/40 split though and international allocation.

The only Vanguard funds I know of with auto-rebalancing and international allocation are the LifeStrategy and Target Retirement funds.

Yes, and you are using it. Any of their balanced funds, including Target Retirement, is auto-rebalanced.

I was thinking more along the lines of one where you can set your customized target allocation using Admiral shares or something.

 

[Boho]

From that article's endnotes:

According to the SPIVA Scorecard compiled by S&P Dow Jones Indices, for periods ended December 31, 2014, 76.25% of actively managed U.S. large-cap equity funds underperformed the S&P 500 for 3 years, 88.65% for 5 years, and 82.07% for 10 years.

I think the SPIVA Scorecard needs to be mentioned more on this forum. It looks like this thread from 2015 has the most recent mention. It quantifies what people refer to all the time. Currently, "91.91% of funds underperformed the S&P 500...8.09% of funds outperformed the S&P 500." One in 100 is the stat I've heard most often. People should know where to find the real stats.

i would guess and say 80% of investor money is in 20% of the funds . most of those mega funds have done quite well beating their benchmarks over most of the time frames.

all one has to do is follow the money and the odds of beating indexing goes up by a lot .

I have no clue about the percentages, but my thinking goes something like that too.

 

[target2019]

That's a straight up 60/40 split though and international allocation.

The only Vanguard funds I know of with auto-rebalancing and international allocation are the LifeStrategy and Target Retirement funds.


I was thinking more along the lines of one where you can set your customized target allocation using Admiral shares or something.

Vanguard Star VGSTX also rebalances to 60/40. The underlying funds are not strict index funds, though.

 

[NW-Bound]

... Burton Malkiel presented the evidence of this in A Random Walk Down Wall Street...

...cash allocations were highest at the past market bottoms of 1970, 1974, 1982, 1987, 1990, 1994 (just before the dot-com bubble began), and 2002...

... the opposite for market tops--low cash allocations, when cash allocations should have been high in anticipation of the coming market crashes...

I do not know if all of that can be blamed on MF managers. When their shareholders draw out money in a market downturn, they have to raise cash to get ahead of redemption. Even if they want to buy, where's the money to buy? Conversely, in a frothy market, there's a deluge of money coming in, and they have to buy.

In 2000, I read an article about a mutual fund where people called in and yelled that the fund did not get fully invested. They said "I send in money for you to invest, not to sit in cash". Some MF managers were scared like hell, but could they do if they did not buy? Their performance would trail the S&P, and it looked bad. People would withdraw money, causing them to sell, and they trail the market even more!

Yep. I wish I had cut out that article to save it. And look at the highly esteemed Wellesley and Wellington funds in the late 90s to see how badly they trailed the market. They did not join in the dot-com mania!

Anyway, if one wants to go against the masses, to try to raise cash when you think that the market is topping out, and to load up when the market tanks, you have to do it yourself. Don't count on MF managers to do it. Whether they are smart or not, they are constrained and do not have the freedom you do as an individual.

 

[NW-Bound]

This subject of market timing comes up every so often. People fail to recognize that MF managers' actions are driven by the masses. And so, how can a MF manager act against the masses, who are their clients.

I like to compare this to politics. Politicians are no saint, but we keep forgetting who votes them into office. Where does the root cause lie?

 

[ER Eddie]

Fidelity beat benchmarks by $35 billion, but does anyone care? | Reuters

Just curious, does that account for the fees?

I ask because when fees are not subtracted, my Fidelity account (FA-managed) is slightly outperforming my Vanguard account (self-managed, mostly index funds). However, when the 1% Fidelity/FA fee is subtracted, the Vanguard account comes out on top.

 

[audreyh1]

Just curious, does that account for the fees?

I ask because when fees are not subtracted, my Fidelity account (FA-managed) is slightly outperforming my Vanguard account (self-managed, mostly index funds). However, when the 1% Fidelity/FA fee is subtracted, the Vanguard account comes out on top.

Well that wouldn't include FA fees, but it does include mutual fund fees. Mutual fund performance stats are always after fees (expense ratios).

 

[ER Eddie]

Well that wouldn't include FA fees, but it does include mutual fund fees. Mutual fund performance stats are always after fees (expense ratios).

Ok, thanks.

 

[RobLJ]

It's (Fidelity Low Price) an interesting example--I put DW's IRA rollover in it in '96 which I just left untouched with reinvestment of dividends and capital gains, and it is one of my core funds, so I have the data in Quicken.

The last 5 years it slightly underperformed the S&P (11.4 to 11.74).
From 2007-2012 it outperformed the S&P (.42 to -1.32)
From 2002-2007, it seriously outperformed (15.15 to 5.52)
From 1997-2002, it also outperformed significantly (13.95 to 8.65)

So, I made a lot of money--for now--on Low Price. I did not buy it as an S&P proxy however, but as a growth for reasonable price midprice/large blend fund.
My sense over the last 7 years is that it is a victim of its own success; the size of the fund has grown so much that I think it is very difficult for Tillinghast the manager (who I think is very gifted) to outperform, particularly in a rising market. A market slump/crash however will be interesting to see what happens, although I'm not that interested to test that. Danoff at Contrafund has had a similar tailing off over the last 7 years along with the now gargantuan size of the fund.

Buying LowPrice now versus 20 years ago are very different propositions.
I used data from DW's rollover not my 403b, since the later was buying monthly and hers was a rollover that just sat there untouched. Her original investment is up almost 900%, by the way, but not quite there. (knock on wood.)

I looked at the Fidelity Low Priced Stock fund he uses as an example in that article. For the most recent 5 years, it has tracked SPY in total return almost exactly. Not sure you can trade on this advice w/o a time machine.

PerfCharts - StockCharts.com - Free Charts


-ERD50

 

[Totoro]

This subject of market timing comes up every so often. People fail to recognize that MF managers' actions are driven by the masses. And so, how can a MF manager act against the masses, who are their clients.

I like to compare this to politics. Politicians are no saint, but we keep forgetting who votes them into office. Where does the root cause lie?

Frequently, it is the system which is the root cause. Unfortunately, those are often very hard to design, and harder still to change. Especially when humans are involved.

Regarding MF managers though I do blame them. It's all too easy (but alas, less lucrative) to setup your own fund that is not exposed to the masses folly. So if you go along with it, either you are incompetent, or are willingly taking advantage of system flaws. Evil or stupid, tough choice

 

[NW-Bound]

Try to be a MF manager yourself and see how you can tell people during a market bubble: "yeah, I trail the market the last two years, then maybe this one too, but if you stick with me, you will be saved when the dot-coms implode".

You will get to manage only your own money, and perhaps that of your wife, if she loves you and you twist her arm.