Market Timing: Should You Attempt It?

Prominent Investment Strategist
Hints It's, Ahem, Time to 'Time'
By TOM LAURICELLA
Staff Reporter of THE WALL STREET JOURNAL
http://www.suite101.com/discussion.cfm/investing/95456/836012

Buy and hold. Stocks for the long run. Market timing is for fools. Decide how much to invest in stocks, bonds and other assets and stick to those allocations. These are the mantras repeatedly thrust upon investors big and small.

Now, however, Peter Bernstein, a respected name among investment professionals for his thinking about portfolio strategies and risk management, says it is time to question these cornerstones of conventional wisdom. If investors are to meet their financial goals, he says, they need to be more flexible and opportunistic.

"What if we can no longer be so confident that stocks are necessarily the best place to be in the long run," Mr. Bernstein told a group of institutional money managers for endowments and foundations at a conference in late January. "What if moving around more frequently is now a necessity rather than a matter of choice?"

Mr. Bernstein then delivered the punch line: "I am talking about market timing -- dirty words."

The speech by Mr. Bernstein, perhaps best known by the general public for his 1996 book, "Against the Gods: the Remarkable Story of Risk," struck a nerve with the audience of nearly 450 investment people. Since the speech, his remarks have been circulated widely, touching off a debate among pension-fund managers and other institutional investors over how strictly portfolios should adhere to buy-and-hold policies. Small investors should take note as well, since investment advice for individuals often has its roots in the world of institutional investing.

Mr. Bernstein says the feedback he has received to the talk and to a subsequent elaboration on the topic in his newsletter has been largely positive. He says he is "flabbergasted" at the amount of feedback he has received. "I've given a zillion speeches and never had a response such as with this one."

Of course, the concept of market timing isn't new. Indeed, the debate between advocates of market timing and strict adherence to asset allocation -- dividing a portfolio among different investments with an eye toward balancing financial goals with the risk of losses -- has been continuing for years and picked up momentum as the stock market posted annual losses over each of the past three years.

One thinker on the issue has been Ben Stein, the law professor, former White House speech writer and former Wall Street Journal editorial-page columnist, who has just co-written a book about market timing. "You do not automatically do well just buying stocks every month," says Mr. Stein, who also holds a degree in economics. "When stocks get to a certain level of ridiculousness, it's time to get out."

Just the term market timing "makes a lot of people very uneasy," says Bob Bolt, chief investment officer at the University of Texas Investment Management Co., so Mr. Bernstein's speech was a surprise to many. "Peter is viewed as a conservative believer in button-down money management -- he's not a wild-eyed bomb thrower," Mr. Bolt says. He adds that Mr. Bernstein's message has "had a tremendous impact" in investment circles, although he notes the $14 billion Texas university endowment already was managed with more flexibility than many other big funds.

Not all investment professionals were so impressed, however. John Bogle, founder of Vanguard Group mutual funds, ranks Mr. Bernstein as a "truly a remarkable person," but says he believes the strategist is wrong to advocate market timing. "I fear his advice is wide of the mark, even ill-begotten," Mr. Bogle said in a June 5 speech rebutting Mr. Bernstein's contentions.

For more than five decades, Mr. Bernstein has been a fixture in the investment world. A New York City native, Mr. Bernstein graduated from Harvard College in 1940 and after a stint in the Air Force, in which he rose to the rank of captain, spent several years as an economist. In 1951, his father died and Mr. Bernstein took over his father's money-management business.

Mr. Bernstein jokes that his real claim to fame came in 1967, when his money-management group became the first acquisition for the brokerage firm then run by Sanford Weill, now chairman of Citigroup Inc. Six years later, Mr. Bernstein struck out on his own again, opening an investment- and economic-consulting firm that he still runs.

Among institutional investors and academics, Mr. Bernstein is known for his work as the first editor for the Journal of Portfolio Management and for his newsletter, Economics and Portfolio Strategy. His circle of friends and associates includes Nobel Prize winners Paul Samuelson, Harry Markowitz and William Sharpe. Now in his mid-80s and continuing to work full time on projects including a book on the Erie Canal, Mr. Bernstein describes himself as someone "with a deep interest in history and a deep skepticism about forecasting."

Skepticism about what has become investing dogma was at the heart of Mr. Bernstein's January speech. The idea that investors should set financial goals and decide how much risk they can tolerate and then keep a steady mix of mostly stocks and bonds likely to produce those risk-reward goals seems like an eternal truth on Wall Street. Yet the emergence of that asset-allocation strategy as the dominant conventional wisdom has been largely coincident with the bull market in bonds and stocks during the past 20 or so years.

During a time of extended rallies, jumping in and out of a market means more often than not that an investor will end up missing out on gains. And as bonds and stocks were both rising in overall value during this prolonged period of mostly bull markets, whether an investor held more or less in one asset class or the other didn't matter because over time the investor made money on both.

Even Mr. Bernstein himself until recently advocated the view that investors should stick to a strict asset-allocation policy. But as the lengthy bond-market rally appears to have reached its limit and stock prices may bounce back and forth for an extended period, the difference between stock and bond returns could narrow, but without any decline in the volatility of those asset classes.

In such an investing environment where the chances of losses are the same but the rewards are smaller, "the risks of being out of the market when it goes up are much less if the upswing is a short-run rather than a long-run development," Mr. Bernstein said in January. He stresses that he isn't advocating rapid-fire trading and doesn't dismiss the value of having an underlying asset-allocation strategy based on an investor's financial goals and tolerance for risk.

Mr. Bernstein also concedes that it isn't easy for investors to time the market. But he counters with more questions: How easy is it to manage portfolios when market fluctuations drive asset allocations away from their targets? How easy is it to decide when to rebalance assets in a portfolio? How easy is it to make changes in long-term asset-allocation decisions?

Allan Bufferd, treasurer for the Massachusetts Institute of Technology who also gave a presentation at the same January conference as Mr. Bernstein, says Mr. Bernstein echoed sentiments that have been floating just below the surface among a growing number of pension and endowment managers. Before the bursting of the technology-stock bubble, "you could just about lock and load a portfolio and go home and go to sleep," he says. "It was hard to be wrong."

But after the stock market's implosion, "we found out in a variety of ways that much more flexibility was necessary," Mr. Bufferd says. Some of that, he notes, has been manifested in growing interest in hedge funds and other nontraditional investment strategies.

Since the January meeting, Mr. Bufferd and his colleagues have had numerous discussions about Mr. Bernstein's thoughts. "Does this mean that style boxes are gone, what about the role of benchmarking to an index, the role of consultants -- there's a lot stuff to think about," he says.

Roger Ibboston, a Yale University professor who heads the Chicago investment consulting firm bearing his name, concedes there are often imbalances in the market that investors could benefit from responding to in the short term -- such as getting out of technology stocks in early 2000. But he says most investors shouldn't attempt to make such calls.

"Maybe a hedge fund might be able to do this sort of thing and make some money, but I think it's a more dangerous policy for individuals," Mr. Ibboston says. "Most individuals and even most institutional investors shouldn't get involved in the markets this way."

Mr. Bernstein is holding his ground. "If we don't know what the future holds, why lock ourselves into a position for the indefinite future?"