Buy and hold or market time?

[Dawg52]

Below is an article from a guy that has pretty much been a buy and hold kind of guy but has recommended some alternative investments for added diversification. Looks like he is moving more into a market timing strategy as he feels we may be in for a long bear market.

I just don't have the personality for much market timing although I do own some commodities for added diversification. What are your thoughts on buy and hold vs market timing?

http://moneycentral.msn.com/content/P149325.asp

 

[brewer12345]

Eh, sounds like they are trying to drum up business for advisors and expensive mutual funds.

I think a well-diversified portfolio is a good idea. That means a dollop of commodities, foreign bonds, foreign stocks and rea estate along with the standard US equity, foreign equity and US bonds. You won't make a huge killing, but over time you should get more than adequate returns to meet your goals.

I personally like to pick individual securities. I try to buy what is cheap and out of favor and I have a long time horizon and a big risk appetite (at least within my individual security portfolio). But I don't suggest this to everyone. Its a "do as I say, not as I do" kind of thing.

 

[kaudrey]

I'm a buy and hold person.  I have tweeked my asset allocation to where I want it, and as I invest over the year, I split up new money between the different mutual fund classes.  I revisit the allocation and rebalance once a year, and once every few years I make an adjustment - about 2 years ago I increased my desired foreign holdings, for example.

I have about 10% of my money in stocks, and about 50% of THAT I consider to be "play" money - where I buy and sell stocks more frequently.

 

[dusk_to_dawn]

Is this guy serious? The answer to buying stocks is to only buy the best, shun weak industries and start market timing? I would do all of the above if I knew which stocks were "the best" and which industries would be the strongest and when the market would go up. I remember somone asking Jack Bogle why he didn't make the S&P index fund perform a little better than the S&P by not buying the worst stocks. He said if he knew which stocks were the worst and which were the best, he would just buy the single best stock and he would trounce the market. The only problem is he didn't know which were the best stocks and which were the worst.

 

[d]

the "key" points being:

Buy a few stocks rather than a bunch; only the best will do.
Shun weak industries.
Use alternative investments, like commodities.
Violate the biggest taboo of all, and start market timing.

Okay!  Now, which few are the best? (I assume those that will return the most ... which ones?)... which industries are the weakest? (no, not this or last year, next year) ... what about a really good stock in a weak industry? ... would alternative investments include uranium and anything being touted by "spam" or "infomercials"? ... how about "Fatbuster"? ... I'd be happy to market time! ... should I sell everything today or tomorrow? and repurchase when?

I find more useful and would rather rely on Will Roger's advice: "Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."

 

[Dawg52]

I emailed Tim this morning and he replied or maybe his assistant replied. I questioned him on his change in philosophy and he basically said that he has to discuss several kinds of investment philosophies. He stated that he still believes in a good core holding of balanced funds but he does believe in adding other investment ideas as the financial markets dictate.

I can understand tweeting your investments to take advantage of market conditions but this particular article seemed to be sending a different message than his previous articles. I guess when you have to write a new article every week you have to try and come up with something different.  I wonder if financial writers from websites such as this one, get paid by mutual funds companies to promote certain investment ideas? hmmmmmmmm

 

[free4now]

A few months ago Hulbert wrote an article about faux Buy and Holders. His point is that if you decide to abandon Buy and Hold when you forsee a market downturn, then you never were a Buy and Holder. You are a Market Timer trying to pretend you are a Buy and Holder. A person who considers themselves a B&Her in rising markets and a Timer in declining markets is only deluding themselves.

If you are a faux B&Her, then you might be better off admitting you are a Timer and learning how to do market timing as best as you can. The worst time to learn how to do market timing is after holding for a long time and deciding you need to need to sell because of the downturn.

So I respect the author realizing that he doesn't have the cojones for B&H and coming up with a plan for timing before he is forced to sell by his ego.

 

[audreyh1]

Interesting discussion!

I guess I don't really understand "buy and holders". I don't consider Asset Allocation to be a Buy-and-hold strategy because when you rebalance you trim assets that outperform and you add to assets that underperform. Seems like buy and hold would never rebalance?

I never wanted to do the work of being a market timer, and I figured I would be wrong most of the time anyway, so I use asset allocation to keep any "market timing" instincts in check, plus it's a pretty darn low maintenance way to go. You are not supposed to rebalance any more frequently than once a year, and 18 months is considered optimal.

And, yes, I did add to my equity funds in Oct 2002 (to rebalance) even though it was a psychologically difficult thing to do. Very glad I did.

Audrey

 

[Nords]

Seems like buy and hold would never rebalance?

Aye, there's the rub.

We're not dirty market timers-- we're just frequent rebalancers.

Which is almost as virtuous as that new category "buy to hold".

 

[haha]

And, yes, I did add to my equity funds in Oct 2002 (to rebalance) even though it was a psychologically difficult thing to do. Very glad I did.
Audrey

Audrey, considering that you are not a timer, how did you choose such a uniquely fortuitous time to rebalance?

Ha

 

[audreyh1]

Audrey, considering that you are not a timer, how did you choose such a uniquely fortuitous time to rebalance?

Ha

It wasn't a uniquely fortuitous time.  I always check my asset balance in mid October.  October tends to have big equity selloffs (but not always).  I also check in mid January and mid April (good time to take profits).  I actually check mid-month at the beginning of every quarter.

I use a % out of range on my asset allocation to add/trim an asset class.  If the balance is off by more than say 5% it triggers a rebalance.

I try to limit my rebalancing to once a year at the most, since more frequently than that doesn't seem to provide much advantage.

It's kind of "timing" but I do this check every quarter, I don't try to anticipate whether it's a bear or a bull market, and whether the market is going to up or down next quarter - I don't care.  I just look at whether my allocation is sufficiently out of balance to justify rebalancing.  Rebalancing is a taxable event for me, so I don't want to take any action unless really called for.

I read about this type of "out of range" monitoring on your asset allocation and how it can help total return a while back.  Sorry - I don't remember this reference.  It's been quite a while.

But the bottom line for me is that I really only check my investments 4 times a year, and take action much less frequently than that!

Audrey

 

[free4now]

I don't consider portfolio rebalancing to be market timing if you do it to maintain a constant balance between different investment types. It's kind of like steering a boat... maintaining a constant heading requires trimming the rudder position often. Doing that gets you where you are heading usually in the quickest amount of time.

Deciding to steer off your course into another area where you think there might be better wind (or less storminess) soon would be akin to market timing. Only probably more successful since experienced sailors can reliably predict those things while experienced investors can't predict the future.

One solid reason why rebalancing isn't market timing is that it is completely driven by the present... you never have to give a moment's thought to where the market is heading. On the other hand if you call switching industries to what's hot "rebalancing" then you are market timing.

It is true that rebalancing to maintain balance will underperform static buy and hold in some situations like if you happen to not have a significant bear market before you die.

The techniques the OP article talks about are pretty clearly market timing: Selling your positions in industries you think are currently weak, buying gold now, trading in and out of ETFs.

 

[maddythebeagle]

I dont think rebalancing by percentages is market timing, either. There are some groups that market time different indexes, which I think sounds kinda nutty...

 

[mathjak107]

market timing is very hard for 1 reason...67% of the time the market goes up and 33% of the time it goes down.this is its historical trend....the house is against you if you bail out as odds are it will trend higher than you bailed out at within a short time of jumping ship. .the drop in 2000 was a once in 20 year event that took an extended period of time to come back...last time was 20 years ago in the 1987 crash.

 

[free4now]

Another reason that market timing is hard is that equity prices often go up in spurts that may only last a few seconds ,or a few minutes, or a few days. Every time you are out of the market for one of those spurts it means you are behind and need to do significantly better than the market just to stay even with buy and hold.

 

[Alan]

market timing is very hard for 1 reason...67% of the time the market goes up and 33% of the time it goes down.this is its historical trend....the house is against you if you bail out as odds are it will trend higher than you bailed out at within a short time of jumping ship. .the drop in 2000 was a once in 20 year event that took an extended period of time to come back...last time was 20 years ago in the 1987 crash.

I read a nice piece of research a few years back that claimed to show that chickens were better stock pickers than humans. It was the standard experiment of 2 feeding stations with a light above each one. If the subject is at the station when the light goes on, it gets a treat. The light comes on and off at random, but it is heavily weighted to one of the lights. With both humans and chickens they quickly figured out which was the dominant light. However, the chicken subjects almost always stopped guessing at this point and stayed in the one place, but most human subjects could not resist trying to beat the odds and ended up with fewer treats than their chicken counterparts over the length of the experiment.

Makes sense if you accept that the market is basically random, particularly for the vast majority of us mere mortals.

 

[mathjak107]

when we accept the market averages over time we are investing...if we try to beat the market averages by being smarter than the markets it becomes speculating.....usually we loose speculating......
when i invest i look at the averages for that investment style.my 55/40 cash,bonds,5% commodities should average 7-8% a year.....anytime i try to beat that by timing or other methods i have to take on more risk than normally......i have learned over the years im not smart enough to do that with any consistancy

 

[brewer12345]

It wasn't a uniquely fortuitous time.  I always check my asset balance in mid October.  October tends to have big equity selloffs (but not always).  I also check in mid January and mid April (good time to take profits).  I actually check mid-month at the beginning of every quarter.

I use a % out of range on my asset allocation to add/trim an asset class.  If the balance is off by more than say 5% it triggers a rebalance.

I try to limit my rebalancing to once a year at the most, since more frequently than that doesn't seem to provide much advantage.

It's kind of "timing" but I do this check every quarter, I don't try to anticipate whether it's a bear or a bull market, and whether the market is going to up or down next quarter - I don't care.  I just look at whether my allocation is sufficiently out of balance to justify rebalancing.  Rebalancing is a taxable event for me, so I don't want to take any action unless really called for.

I read about this type of "out of range" monitoring on your asset allocation and how it can help total return a while back.  Sorry - I don't remember this reference.  It's been quite a while.

But the bottom line for me is that I really only check my investments 4 times a year, and take action much less frequently than that!

Audrey

Audrey, your rebalancing scheme is popular with many institutional investors. I think it makes a certain amount of sense, and likely helps with returns. It is amazing to see a person who is not an investment professional absorb and implement the best practices of the industry. I wish it were more common, frnakly.

 

[unclemick]

Hmmm

75% or so - Target Retirement lets Vanguard do it's thing.

15% stocks plus some cash to putz with. Rough rule of thumb - if total return of a stock including divs hasn't doubled in 7 years - sell and replace.

Pretty active - huh?

Actually watch the market way more than I should.

heh heh heh heh

 

[eytonxav]

Does anyone consider the sell in May go away maxim to be market timing? I understand that historical returns support the concept of going to cash during the historically weakest timeframes for the market (May - Oct) and staying in at all other times.  I am really considering doing just that this year since things seem a little too frothy and perilous right now to simply hold tight.

Doug

 

[REWahoo]

Doug, here's a recent article on the "Sell in May and Go Away" school of investing. It says the practice is supported statistically, but a better place to put your money when you go away for the summer is in bonds, not cash.

 

[audreyh1]

Does anyone consider the sell in May go away maxim to be market timing? I understand that historical returns support the concept of going to cash during the historically weakest timeframes for the market (May - Oct) and staying in at all other times.  I am really considering doing just that this year since things seem a little too frothy and perilous right now to simply hold tight.

Doug

Yes of course!!! Sell in May and go away means sell ALL your equities - go to cash presumably - and then buy equities again in October.

If your investments are in taxable accounts, this guarantees short term tax rates on any profits.

Audrey

 

[audreyh1]

It is amazing to see a person who is not an investment professional absorb and implement the best practices of the industry.  I wish it were more common, frnakly.

Brewer - that was a very nice thing to say!

I had a few years to figure out my "discipline". Thanks to the great university of the internet, these practices are documented.

I really think any engineering type person could do the same. I picked my investment style based on wishing to spend minimal time maintaining my portfolio and knowing myself well enough to know what would "let me sleep at night" - a pretty key characteristic for an investment style. I notice that many of my investing peers love to "tweak" things and are willing to spend a lot of time at it - mostly for the entertainment value I suspect. To each his own.

And frankly I've met many investment professionals who didn't seem to know diddly squat. Of course those are the guys selling things to the general public. The really good ones are hidden from the general public managing huge portfolios for institutions or wealthy individuals - if they are not already retired!

Audrey

 

[brewer12345]

And frankly I've met many investment professionals who didn't seem to know diddly squat.  Of course those are the guys selling things to the general public.  The really good ones are hidden from the general public managing huge portfolios for institutions or wealthy individuals - if they are not already retired!

Audrey

You got it exactly right: most of the so-called investment professionals the retail person is likely to meet are salespeople, pure and simple. The sophisticated people arre usually locked away quietly managing institutional or very high net worth individuals' money and don't talk to the average joe.

 

[yakers]

What Brewer said.

This rings true to me, the image I use is the huge amount of visable gambling in Las Vegas. Yet the high rollers get their own invisable space, almost another universe. In the 1980s I had a friend in London who did some metals market trading on the London Metal Exchange. He was also later a manager for (I assume a small) part of the Rothchild family fortune. He explained what he did, things like hedging, but it didn't stick in my mind much, makes more sense these last 10 years or so.
I remember him saying, and this is 1980s London, that the traders would work their way up and eventually make 1 to 3$M a year, but their career life expectancy was also 1 to 3 years before burning out. For all the discussions on these boards and all the mutual funds, the rich really are different. They do employ financial managers but not the type we would generally encounter. And the approaches they take may not be appropriate for folks with normal assets and income. They don't just buy stocks; like Warren Buffett, they buy the whole company.
But I have to manage my money the way it comes in; pension, 401k/TSP, Roth, DRIP stocks, ibonds & cash. I don't confuse myself with the more sophisticatd investment ideas. I dollar cost average because thats how the money comes in. I buy and hold because I don't have the time, and I mean the 24/7, it takes to be a trader.