Market Timing: Should You Attempt It?

Top 2. Jun 12, 2000 11:23 AM

» Rande - Great article Kirk.

Great article Kirk. The serious academic studies that have been done on the subject of market timing point again and again to two primary reasons why such activity inevitably fails, given enough time and enough attempts:

1. Transaction costs/expenses and taxes -- the culprits which eat into the returns of all investors also happen to be the ones we have the most control over. At one extreme, long-term index investing solves this issue. At the other extreme, in-and-out market timing exacerbates the problem.

2. The long-term general upward bias of the market and the fact that upswings can come unexpectedly and with great vigor make timing a risky business. Simply put, the historical odds favor being in rather than out of the market. Many of us have seen summaries of the studies which show that if you remain fully invested for most of the time but miss only a handful of up periods, you're chances of underperforming T-Bills, let alone the broad stock market, is high. Stocks are volatile and the only way to reap the rewards of the up periods is to endure the down periods. This, of course, presumes getting out and then back in at the proper moments over, and over, and over again is impossible without tripping up at some point with respect to the repeated round trips. How to stay in long enough to reap the rewards? Asset allocation is the answer, of course.

Asset allocation is an invdiviudal issue -- there is simply no one-size-fits all approach. Young investors with their lifetimes ahead of them can afford to take more risk, all things being equal. Older investors, relying on their asset base to maintain thier standards of living must take less stock market risk. At any age, the level of net worth also plays a role -- why take more risk than you need to at any age if capital accumulation is no longer a primary goal? But whatever the appropriate allocation to stocks and bonds might be, flitting back and forth with any significant percentage of the portfolio, all at the whim of what really amounts to fortune telling, is a sure-fire way to decrease wealth over time because of:

Taxes
Trading Costs
Opportunity costs of being wrong

-- posted by Rande

Top 3. Jun 12, 2000 1:51 PM

» Happy - Good article Kirk.

Good article Kirk. It certainly goes along with my experiences, after 40 years in the market.

-- posted by Happy

Top 4. Jun 12, 2000 2:53 PM

» Will_L - Great Article Kirk--and right on the money.

Great Article Kirk--and right on the money. There are places that kind of thinking will get you branded "a simpleton" smile

, but the truth is NOBODY has been able to do the timing thing consistantly and outperform those who don't.

Perhaps the biggest tragedy is not an attempt to do this one time in an investment career but to somehow become convinced it is doable and continue on your own or with the help of a changing cast of gurus seek to find the perfect "timing scheme". I thought of that when I saw this post this morning.http://www.bobbrinker.com/message.asp?th...

Here is something that totally makes no sense--a 23 year old just beginning an investment career worried about timing. I would hope he looks at any type of data that shows what long term investing in equities starting at age 23 has done and "fuggetaboutit" when it comes to timing. He will be much better off regardless how this call that is 5 months in the making now and giving him the "third opportunity" to get out of his equities turns out.

Will

-- posted by Will_L

Top 5. Jun 12, 2000 2:58 PM

» Will_L - Of course over there the post may be fictious and only used for

Of course over there the post may be fictious and only used for the one sentence glorifying the guru. But if not it is a real shame.

-- posted by Will_L

Top 6. Jun 12, 2000 3:50 PM

» SteveT - Kirk, Will

Kirk, great article this sets up some good discussion and sharing of experiences. Will, I guess it is human nature to try to do better than the other guy/gal.

I would suspect everyone at one point tries to "time the market", I have. I was pretty lucky. My plan was to adjust my allocation in small increments as the level of the S&P 500 went up and down. When the market p/e was high and so was risk I would sell S&P 500 index in my 401K ( no taxes & transaction costs) and put the proceeds in money market or a bond fund. Then as the S&P corrected I bought it back. I did get stung one trip due to the price fluctuation in the bonds. I lost about half of the benefit I could have made had I put the proceeds from the sale of S&P 500 in a money market fund.

I never varied my allocation by more than 5% in any one move. I learned a good lesson about the risks in bonds. After reviewing my results for calendar year 1999 it didn't hurt me. On the other hand I did go to a huge amount of effort to raise my total return for that year by a little less than 2%. At the end of 99 I decided this wasn't for me, I had better things to do with my time. When I think of what could have gone wrong, I believe I have made the right decision.

-- posted by SteveT

Top 7. Jun 13, 2000 7:23 AM

» FCSTECKIII - Kirk

Great article; filled with plenty of wisdom ...

Something that I've often wondered myself is the
proprietary timing models being used by the pros
and if they truly ever work in the first place.

To be honest, if I was able to create a computer
based timing model that was able to consistently
signal whether I should be 100% invested in the
market or whether I should be 100% in cash, why
would I put my 'performance' at risk by sharing
this information with millions of other people?

Plainly stated, would I want to share my 'secret
for success' if I've found a way to consistently
pick the correct Lotto Numbers? -Thanks

-- posted by FCSTECKIII

Top 8. Jun 13, 2000 7:28 AM

» Rande - Fred,

Fred,

Assume that's a rhetorical question, but for those who aren't sure the answer is plain:

Because you will make more selling the model than using it.

(Not only that, but the return from sales is risk-free if you are held harmless from a fiduciary perspective.)

-- posted by Rande