Market Timing when to ditch equities

[LOL!]

This deserves its own thread even though it is related to RunningMan's thread about selling equities and going to a more conservative asset allocation.

A very nice article about Recessions, Inverted-Yield Curves, Unemployment claims, the Manufacturing PMI, and Market Timing from our friend Big ERN at Early Retirement Now:

https://earlyretirementnow.com/2018/02/21/market-timing-and-risk-management-part-1-macroeconomics/

After reading this article, I am even more confident in increasing my allocation to equities.

 

[Gumby]

Good article. I also look at the Conference Board LEI chart. It peaks at least 6 months prior to a recession.

 

[OldShooter]

... After reading this article, I am even more confident in increasing my allocation to equities.

With respect: Confirmation bias?

If any of these dart-throwing monkeys could make accurate predictions he/she would be on a private tropical island sipping from a glass garnished with an orchid and making a few trades when the checkbook got low. He would not be working "full-time in the asset management division for a large bank." He would also not be working for a mutual fund company, an asset manager, a wire house, or an investment newsletter. IOW if such a monkey actually exists, we will never know it.

My favorite quotation recently is from John Kenneth Galbraith: "The purpose of economic forecasting is to make astrology look good."

 

[LOL!]

Whatever. The indicators are discussed along with their caveats and errors. I didn't see any evidence of dart throwing or using "feelings."

What I did like is that reasons for the February drops suggested no problem and a buying opportunity. As you know, I bought quite a bit during the drop and have sold at a gain after equities went back up.

 

[Onward]

OldShooter's point is that the world's smartest analyst, using the world's most advanced indicators, has as much chance of accurately calling market direction as a dart-throwing monkey.

And ... Oops! OldShooter is right.

The moment you ask, "Is this the right time to get in?" or "Is this the right time to get out?" you are lost. Doesn't matter what "evidence" you have. You may win one or two, but in the long run you are executing an inferior strategy.

Snatch the pebble from my hand...

 

[NW-Bound]

I like the article. It shows how the inverted yield curve usually preceded a recession. This is not original with this article.

I recall in 2007 people talked about it, but some people dismissed it. I will not be dismissing it the next time it happens.

 

[LOL!]

The moment you ask, "Is this the right time to get in?" or "Is this the right time to get out?" you are lost. Doesn't matter what "evidence" you have. You may win one or two, but in the long run you are executing an inferior strategy.

I agree with the gist of that sentiment. I am always in and never out.
Sometimes though I am more in than I would otherwise be.

Even folks like me who have a portfolio of passive index funds with low expense ratios have to decide when to rebalance -- or if you like: when not to rebalance.

 

[pb4uski]

My subtle version of market timing is what I call "opportunistic rebalancing"... I'll rebalance when markets "feel" over or under valued... for example, I rebalanced during Brexit cause I "felt" like markets overreacted, and I sometime rebalance during strong rallys that "feel" like they have gone up too much too fast... I know it is just nibbling at the edges but it is a fun game for me.

 

[OldShooter]

Thanks @Onward. You make my point nicely.

Let me try it from another angle: This particular monkey works "full-time in the asset management division for a large bank." If he had any forecasting skills at all, certainly bank management would have recognized this and promoted him to Chief Economist or some other position where his forecasting skills would be of great benefit in guiding the bank's business decisions.

Re "The indicators are discussed along with their caveats and errors." Any successful witch doctor, fortune teller, palm reader, magician, or prophet will use props and sophistry to make himself sound more credible. Crystal balls, black top hats, masks and rattles, pairs of parameters graphed together, ... really no difference.

I'll stop now. This is not a debate that ever leads to agreement.

 

[splitwdw]

LOL, Thanks for posting that link.

 

[USGrant1962]

My subtle version of market timing is what I call "opportunistic rebalancing"... I'll rebalance when markets "feel" over or under valued... for example, I rebalanced during Brexit cause I "felt" like markets overreacted, and I sometime rebalance during strong rallys that "feel" like they have gone up too much too fast... I know it is just nibbling at the edges but it is a fun game for me.

"Opportunistic rebalancing" - I like it. It is a good description of my approach as well.

For my overall AA I've settled on an "age in stocks" approach based on a muted rising glidepath (see research by Pfau, Kitces, ERN and others). Muted in that those guys talk about going from 30/70 to 70/30 over some period of time. I'm going from 55/45 to 70/30 between now (55 and just retired) and SS (at 70). However, my default is the traditional 60/40 so in addition to that research I decided that 55/45 "feels" right with the current high stock market valuations, and that feeling went into my age-in-stock equation.

55/45 actually feels strange to me because throughout my accumulation phase I was 90-100% equities, but the recent 10% correction was instructive because I only lost 5.4% from the peak.

My sub-allocations are also feelz-based, so within my equity allocation I'm currently heavily weighted in international stocks, again based on valuations. Similarly, I've been reducing my duration/maturity on by fixed income side pending rate hikes.

In the end I suspect this may have little impact vis-a-vis a static 3-fund portfolio, but it feels like I'm doing something!

 

[LOL!]

BTW, the linked article is about Risk Management and is not about ditching equities like RunningMan did.

I think we all manage risk in our portfolios.

 

[audreyh1]

I like the article. It shows how the inverted yield curve usually preceded a recession. This is not original with this article.

I recall in 2007 people talked about it, but some people dismissed it. I will not be dismissing it the next time it happens.

Well the curve was starting to flatten and looked like inversion might happen until end of Han when suddenly all rates started moving up. Can’t say it’s steepening, but it stopped flattening and started developing a bit of a center bulge.

 

[NW-Bound]

Here's the yield curve in Jan 2018, compared to one in Jan 2007.

Note that this curve is already outdated, as the 1-yr yield is now 2.02%, 2-yr yield is now up to 2.25%, 30-yr yield is up to 3.16%.

 

[audreyh1]

Yeah the current yield curve has changed dramatically since early Jan 2018.

Rates have moved up sharply across the entire curve, with a little bulge developing between 5 and 10 yr duration. Rates have kind of shifted left with the 5 yr where the 10 was a month ago, the 10 yr where the 30 was at start of the year, the 2 where the 5 yr was at the start of the year.

Current curve scroll down this page https://www.marketwatch.com/investing/bond/tmubmusd02y?countrycode=bx

 

[Lsbcal]

About that article, I use some of this kind of data in my own model. I think getting into the data and doing your own analysis is best. Very few people do this despite all the talk back and forth about the futility or good of market timing.

I use the 10yr - 3month Treasury data because the Fed really controls the 3 month Treasury. Not sure about the 2yr Treasury. The Fed source for this (nice chart) is here:
https://fred.stlouisfed.org/series/T10Y3M
BTW, the inverted yield curve also predated the 1929 crash.


Such indicators are not going to be the only source of market timing success. You cannot hang your hat on them but maybe looking at equity momentum along with these will work. We will see looking back from the next recession low.

 

[OldShooter]

About that article, I use some of this kind of data in my own model. I think getting into the data and doing your own analysis is best. Very few people do this ...

I have no problem with people who want to play with the numbers. But I would point out something I think is important: The DOL says that there are 950,000 people working in the investment industry. There are something like 8-9K mutual funds and another 2k or so ETFs. So I think it is logical to expect that there are thousands if not tens of thousands of people studying the numbers, especially simple things like the yield curve. Not "very few."

So (1) IMO it is unlikely that an individual working alone will find anything that has not already been found by many others and (2) in the event there is some kind anomaly or mispricing, it will quickly be arbitraged away by thousands of traders jumping on it.

So ... we're back to Malkiel's random walk and, probably, to Fama's Efficient Market Hypothesis.

 

[Lsbcal]

I meant very few individual investors.

Anyway I get your point. You don't like market timing period.

Different viewpoints make up markets. I am not going to change mindsets here and that is fine.

 

[RonBoyd]

Mr. Buffett has an idea when one should ditch equities:

https://www.marketwatch.com/story/w...t-delivered-this-unexpected-lesson-2018-02-24

Buffett acknowledged that in any “upcoming day, week or even year” stocks are “far riskier” than short-term U.S. bonds, but as an investor’s investment horizon lengthens, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, if the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

(If you don't already know his Annual Letter is here.)

 

[OldShooter]

... Anyway I get your point. You don't like market timing period.

Different viewpoints make up markets. I am not going to change mindsets here and that is fine.

Oh, I like the idea of market timing a lot. I've just read enough (and tried myself a few times) to believe that it is impossible. Not that people can't get lucky, though.

 

[bradaz2488]

I do not see myself "ditching" equities completely. My ER plan assumes a 6% yield (3.5% w/o inflation) so I tend to play on the conservative side of the field since retiring in 2013. During my w*rking years I was 80-90% equities, but since I retired I have not exceeded 65% equities. I'm currently at 53%. I do not think "I" would be comfortable holding more then 65% equities in retirement, but I have no plans putting money into the markets at these levels. If S&P returns to 2400 level I'll start to add. Would not surprise me if we return to 2100 on the S&P. If we continue to go up and surpass the S&P high of Jan'18 I may consider reducing my equity exposure, but probably would not reduce below 25%. Of coarse I reserve the right to change my strategy and plans at any time

 

[audreyh1]

Mr. Buffett has an idea when one should ditch equities:

Buffett acknowledged that in any “upcoming day, week or even year” stocks are “far riskier” than short-term U.S. bonds, but as an investor’s investment horizon lengthens, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, if the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

https://www.marketwatch.com/story/w...t-delivered-this-unexpected-lesson-2018-02-24

(If you don't already know his Annual Letter is here.)

That is such an excellent way to put it! Thanks!

 

[NW-Bound]

I saw that excerpt earlier. Note the caveat:

... if the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

When the interest rate is no longer 2 or 3% but 4 or 5%, then the P/E of 25 will no longer be sensible. Stocks will be repriced accordingly.

I don't know if interest rate will rise that high, but it shows why one cannot ignore things going on in the market.

 

[Lsbcal]

What Buffet did not say is how to handle a retiree portfolio as one ages. He is in a very different position then people in this forum.

 

[NW-Bound]

Yes. Buffett has to run BRK as an everlasting company, not as a retiree's portfolio in the drawdown phase. And that's how he justifies saying that stocks are actually less risky than bonds in the long run. Retirees may not have that much time left to talk about a long run.

He has been making no bones about bonds. He called bonds "reward-free risk" a few years ago. I don't know if he only took that stance after the Great Recession and interest rate dropped super-low, or if he has always said that. He'd rather hold a lot of cash or short-term instruments. I also have the same uneasiness about bonds.