Market timing and the individual investor

[REWahoo]

This article isn't new news and it does "preach to the choir," but it is timely with the market currently at an all time high. Bottom line: market timing isn't a viable strategy unless you want to make investing your full-time job - and your lucky charm is working up to full potential:

Further illustrating the costs of mis-timing the market: the annualized total return of a portfolio invested in the Standard & Poor’s 500-stock index from 1993-2012 was 8.2%. But if you pulled that portfolio out of the market for just the top 10 days, the return dropped to 4.5%. If you exclude the 20-best days, the return was just 2.1%. Missing by just a little bit can make a big difference.

One more example showing why I've got no business trying to time the market. Too much work to try to 'guess right' and very little margin for error.

Timing the stock market should set off your alarm

 

[Lsbcal]

I agree that most investors should not try to time the market.

The stats on pulling out some of the best up days of the market are not to be taken seriously I think. This is because if you are out of the market when it is going down you will most likely also miss some very excellent up days. But taking out just those up days is being selective and is biasing the results.

To me the better comparison is to propose a technically based market timing technique and then compare results over rolling long term periods. Most of the time one will find that some MT techniques win over buy-hold during some periods never over all periods. Plus MT takes steal discipline which most would not have and/or have the time for.

To me the worst sort of MT technique is of the "watch headlines and react" type. There is lots of that going on.

 

[Donzo]

The market does tend to move in "spurts" as we have seen recently. You need those days/weeks to make the return.
Re-allocating can also throw a wet blanket on returns if you R-A early during a bull run. I R-A from a mid 70% to 50% stock exposure at 13,800
DOW. I have enjoyed nice returns but missed out on alot of moola by that early R-A (market timing?).
Of course, had the market taken a dive I would have been a genious!

 

[REWahoo]

Plus MT takes steal discipline which most would not have and/or have the time for.

Not to mention the fact stealing is illegal...

 

[rbmrtn]

A different take. The best 10 days and worst ten days are clustered very close together and tend to cancel each other. Both occur in the context of bear markets and extremes in volatility. Missing both actually results in better returns.

Missing the Ten Best

 

[REWahoo]

A different take. The best 10 days and worst ten days are clustered very close together and tend to cancel each other. Both occur in the context of bear markets and extremes in volatility. Missing both actually results in better returns.

From the linked article:

Is it possible to devise a strategy to take advantage of these trends? My findings suggest that, given the close proximity of best and worst days, it may be unrealistic to devise a strategy that can capture one (best days) and avoid the other (worst days). But the closeness of the best and worst days, combined with the fact that they occur during periods of heightened market volatility, might allow for the possibility of devising a strategy that avoids both.

Knowledge Quest

It's beyond the scope of this article to devise a viable strategy. My purpose here is merely to suggest that a comprehensive study might yield a useful indicator. Critics will argue that this is market timing and that market timing doesn't work.

Granted, there are a multitude of studies that draw the conclusion that no one can consistently time the market (you know—like "Don't Miss the Ten Best"). But just because a thing hasn't been done is no proof that it can't be done. Clearly, successful market timing is not easily accomplished. But then, human flight, landing on the moon, and mapping the human genome were similarly difficult tasks. But that didn't stop mankind from achieving them.

Even this guy equates market timing with rocket science...

 

[Lsbcal]

If one spent loads of time developing a market timing methodology and testing it in the market, would one freely share it with others?

All the MT stuff that is available in articles and papers is generally out there because it's not very useful.

 

[FinancialDave]

If one spent loads of time developing a market timing methodology and testing it in the market, would one freely share it with others?

All the MT stuff that is available in articles and papers is generally out there because it's not very useful.

Ya, you have got to believe, if it is out there - it's not very useful.

The other words of wisdom have to do something with a monkey and some darts.

Which simply means there are always strategies that look good when viewed with a historical perspective, for the simple fact that if you flip 1000 coins the averages tell you that 500 will turn up heads in the first round, 250 in the second round, 125 in the third round and so on -- so when looking at the universe of stocks over 5 years or even longer there are going to be a number of them that merely fit into a pattern of luck - which of course will be touted as the next best thing.

 

[haha]

I don't time the market in the way that most people mean when they say market timing. In general, I hate to discuss investing because people almost always put up some strawman or red herring, which often involves some impossible criterion for success, or some bit of folk knowledge that may have or have had some validity but is clearly less than universal.

But in 40 years of active investing, I have never failed to vary my exposure to various equities depending on my assessment of risk/rewards. I walked into the 2008 downturn close to fuly invested, but I think that will be the last time.

Overall, intelligent timing which I think of as avoiding big risk will tend to pay off over time. I missed much of the late 90s blow off, but I also missed the aftermath as I was heavily invested in "the old economy", in particular tobacco stocks.

I perceive the dominant style on this board, as on other right thinking forums, to be agnosticism about expectations. That just isn't my personality, I will often have an opinion.

I remember sometime in the 00s, we were discussing Robert Shiller's first book Irrational Exuberance. I posted that I thought that although this was not what is often meant by market timing, it was in fact a very effective form of timing, and perhaps almost the only effective form there was or could be. A very popular, outspoken and verbose former denzen on this board pointed out that Shiller would have had us out of the market since the mid 90s. True indeed, but that is the reality of trying to minimize risk. It is not realistic think that you can ride a wild boom and be certain to dive off just before the crash. Like many other games of chicken, it can pay to be chicken when things are getting crazy.

Ha

 

[pb4uski]

I'll admit that given the great run in equities since year end, I am thinking it is too much/too quick and a pull back is likely. Also, even though I rebalanced at year end, I am still now sufficiently out of balance to justify rebalancing. I guess I rationalize that I rebalance judiciously rather than at specific times of the year like others do.

But rather than selling stocks and buying bonds, the proceeds will stay in cash (actually ST bonds which I consider to be a cash equivalent) and add another year or so to my liquidity bucket (which after this transaction will be as full as I would care to keep it).

Overall after this rebalance I'll still be 60/40, but the 40 will be 28/12 of bonds/cash. While I was working that bonds/cash ratio was 40/0, but as an early retiree living off my nestegg (pensions & SS not started yet) I like the idea of having a few years of expenses in cash - I sleep better at night. Also, if we have a real deep dip, I could use it as dry powder.

I'm still trying to decide whether or not this all makes me a market timer, but I'm not sure if I care.

YMMV

 

[samclem]

Also, if we have a real deep dip, I could use it as dry powder.

I've said the same thing to myself, but I wonder how well it would work in practice. If the market were down a lot we should expect it will take longer to regain the losses. So, sitting there in that hole and wondering if it will be 3 or 8 years before the market gets even again, I might have a tough time spending some of that dough I could otherwise use to delay the sale of beaten-down equities for another couple of years.

 

[clifp]

I don't time the market in the way that most people mean when they say market timing. In general, I hate to discuss investing because people almost always put up some strawman or red herring, which often involves some impossible criterion for success, or some bit of folk knowledge that may have or have had some validity but is clearly less than universal.

But in 40 years of active investing, I have never failed to vary my exposure to various equities depending on my assessment of risk/rewards. I walked into the 2008 downturn close to fuly invested, but I think that will be the last time.

Overall, intelligent timing which I think of as avoiding big risk will tend to pay off over time. I missed much of the late 90s blow off, but I also missed the aftermath as I was heavily invested in "the old economy", in particular tobacco stocks.

I perceive the dominant style on this board, as on other right thinking forums, to be agnosticism about expectations. That just isn't my personality, I will often have an opinion.

I remember sometime in the 00s, we were discussing Robert Shiller's first book Irrational Exuberance. I posted that I thought that although this was not what is often meant by market timing, it was in fact a very effective form of timing, and perhaps almost the only effective form there was or could be. A very popular, outspoken and verbose former denzen on this board pointed out that Shiller would have had us out of the market since the mid 90s. True indeed, but that is the reality of trying to minimize risk. It is not realistic think that you can ride a wild boom and be certain to dive off just before the crash. Like many other games of chicken, it can pay to be chicken when things are getting crazy.

Ha

While I think for the average person market timing is a fool's errand. I don't think this board is average when it comes to investment skills. As Buffett says temperament is more important than intelligence. To a large extent the same traits, the willingness to question conventional wisdom (what I don't to wait till 65 to stop working) that make somebody a good candidate for ER are the same traits that make some potentially a good investor.

It is rather gratifying to all the threads wondering if the market high means it is time to sell/rebalance etc. This is exactly the right view and probably quite a bit different than the average investor who sees a record high and thinks well I guess it is safe to get back into to stocks .

My AA has changed from just over 50/50 in 2000, to as high as 90% in early 2009. Like Ha I walked into the 2008 meltdown fully invested.

The internet bubble was painful, but would have been far worse, if I hadn't listened to smart people, and just as importantly done my own analysis that convinced me that the stock market as a whole and internet stock were crazily overvalued and took rather dramatic action.

There were less people predicting the 2008 meltdown, than the internet bubble bursting but board member RunningMan made many post about the coming credit/housing bubble. Now predicting a bear or bull market is easy, what isn't easy is making a cogent argument supporting your view in the face of conventional wisdom, he did. The same way Buffett did in July 1999. I don't beat myself up for not selling in 2008, I do beat myself up for not reading posts like RunningMan, thinking to myself he makes some good point and not doing some further analysis.

Likewise, there were plenty of people on this board all presenting argument passed on historical data that stocks were cheap at the end of 2008 and in 2009. If you sold out in 2008 and read the boards in 2009, you owed to yourself to at least question am I doing the right thing not buying stocks in 2009.

Right now I don't have a strong opinion on the stock market. Yes it has gone up pretty far pretty fast, but on an inflation adjusted basis it is 13% below its 2000 peak. This despite significantly higher profits and an economy which is 19% larger now than it was in 2000 (after inflation).

On the other hand I still hate bonds and I so I hold as little of them as possible, cause I agree with Buffett, bonds are "reward free risk" Now hating is bonds is pretty popular both on the board, and by most money managers, but it is worth remembering that until recently there have been huge outflows of money from stock into bonds, even while the market has rallied.

 

[FinancialDave]

I walked into the 2008 downturn close to fuly invested, but I think that will be the last time.


Ha

I like that, HaHa!

 

[Mulligan]

I'll admit that given the great run in equities since year end, I am thinking it is too much/too quick and a pull back is likely. Also, even though I rebalanced at year end, I am still now sufficiently out of balance to justify rebalancing. I guess I rationalize that I rebalance judiciously rather than at specific times of the year like others do.

But rather than selling stocks and buying bonds, the proceeds will stay in cash (actually ST bonds which I consider to be a cash equivalent) and add another year or so to my liquidity bucket (which after this transaction will be as full as I would care to keep it).

Overall after this rebalance I'll still be 60/40, but the 40 will be 28/12 of bonds/cash. While I was working that bonds/cash ratio was 40/0, but as an early retiree living off my nestegg (pensions & SS not started yet) I like the idea of having a few years of expenses in cash - I sleep better at night. Also, if we have a real deep dip, I could use it as dry powder.

I'm still trying to decide whether or not this all makes me a market timer, but I'm not sure if I care.

YMMV

I have only started investing in mutual funds in the past few years again. I take part of my pension check each month and have it automatically invested. Most of my money is still in IBonds, CDs, and cash. Unfortunately I have to accept the fact that a big downturn in market would not help me, because I know I would miss it. I would think, I will let it drop a little bit more then buy. Of course it would turn up and I never would get in then.

 

[Animorph]

I have only started investing in mutual funds in the past few years again. I take part of my pension check each month and have it automatically invested. Most of my money is still in IBonds, CDs, and cash. Unfortunately I have to accept the fact that a big downturn in market would not help me, because I know I would miss it. I would think, I will let it drop a little bit more then buy. Of course it would turn up and I never would get in then.

I try to divide my investable cash into about 5 parts. The first part is reinvested when the market (I use (EFA+SPY)/2 total return as my index) is down 20%. The rest is reinvested in steps of 5% to 10% down. You know it's a big downturn at -20%. You just don't know how low it will go and for how long. As soon as the market is up 10% from your last step of reinvestment you can go ahead and sell it if you need to (for expenses) and know that you made an extra 10% on that cash.

 

[Mulligan]

I try to divide my investable cash into about 5 parts. The first part is reinvested when the market (I use (EFA+SPY)/2 total return as my index) is down 20%. The rest is reinvested in steps of 5% to 10% down. You know it's a big downturn at -20%. You just don't know how low it will go and for how long. As soon as the market is up 10% from your last step of reinvestment you can go ahead and sell it if you need to (for expenses) and know that you made an extra 10% on that cash.

Solid plan. I will look at this in terms of buying, as I probably will never sell what gets dumped into my STAR and Total Index, as the money will not be used to live on. Already been burned on my last two years of Roth contributions though they are small $5k contributions. Still it's the principal of the thing. I should have bought it all on Jan.1, but I get cute and wait for a little pull back which won't happen until after April 15. The less I think, the better my returns!

 

[Lsbcal]

I try to divide my investable cash into about 5 parts. The first part is reinvested when the market (I use (EFA+SPY)/2 total return as my index) is down 20%. The rest is reinvested in steps of 5% to 10% down. You know it's a big downturn at -20%. You just don't know how low it will go and for how long. As soon as the market is up 10% from your last step of reinvestment you can go ahead and sell it if you need to (for expenses) and know that you made an extra 10% on that cash.

Did you ever test this approach in various markets going back some decades and compare to other approaches (such as taking your highest equity allocation and just doing buy-hold)? Monthly SP500 and EAFE data is available going back to at least 1970. You can get the SP500 stuff from Yahoo history and EAFE from MSCI.

Whatever I've done has been back tested. No assurance of future success but at least it worked before.

 

[timid investor]

This article isn't new news and it does "preach to the choir," but it is timely with the market currently at an all time high. Bottom line: market timing isn't a viable strategy unless you want to make investing your full-time job - and your lucky charm is working up to full potential:

One more example showing why I've got no business trying to time the market. Too much work to try to 'guess right' and very little margin for error.

Timing the stock market should set off your alarm

I'm a firm believer in the benefits of index investing but both extremes on the "market timing " issue couldn't be more wrong.

The key is managing market risk: increasing leverage or equity exposure inversely to market risk.

The most important thing to recognize about market risk is :
a) market highs and low volatility indicate : a relatively high risk environment
(btw that's where we are now)
b) market lows following a period of high volatility: is a relatively low risk environment (march 2009)

So if your in now you might think about scaling back on your equity exposure.

And if you're not in , now is not an especially wise time to get fully invested.

 

[MichaelB]

Hello timid investor. Is this a new record for longest time taken to write the first post? Welcome to the forum.

 

[Lsbcal]

First, I do not know where we are at in the cycle and never will.

Second, if you think this is an unusual market you have only to look at the SP500 in relation to past decades to see that this is not all that unusual. One chart I posted is available here: http://www.early-retirement.org/forums/f28/where-will-the-teens-take-equities-64368.html

 

[haha]

First, I do not know where we are at in the cycle and never will.

Second, if you think this is an unusual market you have only to look at the SP500 in relation to past decades to see that this is not all that unusual. One chart I posted is available here: http://www.early-retirement.org/forums/f28/where-will-the-teens-take-equities-64368.html

Well, monetary policy sure seems unusual. As does governemnt debt, if by unusual we mean rarely occurred in the past. In fact never in the 20th century, other than in times of huge wars.

Ha

 

[Lsbcal]

Well, monetary policy sure seems unusual. As does governemnt debt, if by unusual we mean rarely occurred in the past. In fact never in the 20th century, other than in times of huge wars.

Ha

I was referring to price behavior of the SP500, not all the driving forces. All those forces that drive prices are somehow put into a pricing machine and out comes what we have now. I don't know anyone who can predict better then the market's pricing at the moment.

We all tend to see the world through different lenses and that's what drives those prices. My approach to investing just relies on pricing and maybe a little valuation data. Others may choose to set their investments based on where they think prices ought to be but not me. I'm not saying I'm a believer in the strong version of the efficient market hypothesis but I could be OK with an approximately EMH concept.

 

[Animorph]

Did you ever test this approach in various markets going back some decades and compare to other approaches (such as taking your highest equity allocation and just doing buy-hold)? Monthly SP500 and EAFE data is available going back to at least 1970. You can get the SP500 stuff from Yahoo history and EAFE from MSCI.

Whatever I've done has been back tested. No assurance of future success but at least it worked before.

Nope, just did it in 2008-2009. What I outlined above was only a plan for investing cash in a down market, sort of a trigger-based DCA. If you have the cash already, it beats just hanging onto it while the market dips and then recovers. There may be an optimum set of triggers and amounts to invest that would backtest nicely, but I haven't done that.

In order to raise that cash initially I have been following my retirement portfolio projections and selling when the market is ahead of plan. So far so good, but I'll remain flexible with it. That's my version of market timing.