Market Timing: Should You Attempt It?
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- Kirk
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- SteveT
- radiodude
- axolotl
- Kirk
- axolotl
- Kirk
- KLR
- KLR
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» Kirk - Peter Bernstein Favors Market Timing?
.Perhaps hitting age 80 has something to do with his change of heart?
I'd be interested if he has now learned about valuation models such as Dr Ed Yardeni's Fed Model variation I talk about here where I think you can make a case for a degree of market timing in how to set your asset allocation.
August 27, 2003 12:11 a.m. EDT
Bernstein's Shocking Words:
Market Timing
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?"
-- posted by Kirk
» KLR - The Promise and Peril of Market Timing
.Here's why I compare market timing to "sudden death" playoffs. Back in 1996, when the last leg of the bull market was barely under way, Mark Hulbert took a look at market timer's success rate:
"On a pure timing basis, just 3% of the stock timing strategies tracked over the last five years have done better than a buy-and-hold approach. The percentage of timers beating a buy and hold over the last eight years also is strikingly low, at just 3%." With such a low chance of success, why do so many gurus continue to try to time the market, and why do so many subscribers, in effect, ask the impossible of their advisors? Mark Hulbert has an interesting answer, in describing what separates the market timers from the buy-and-hold crowd:
"Why is it that, on the one hand, virtually every one of today's letters that have been around since the 1973-74 bear market is a firm believer in market timing? And why, on the other hand do so many of the stock market letters that have been launched since the 1987 crash believe equally firmly in buying and holding? My answer: Market timing's popularity follows a historical cycle of its own. After sustained bull markets, market timing falls into widespread disrepute and buying and holding becomes very popular.
"After secular bear markets like 1973-74, in contrast, market timing enjoys a dramatic renaissance and the buy and holders disappear. By the time of the December 1974 bottom, according to Investor's Intelligence, there were virtually no believers in buy and hold at all. Everyone had become a market timer-at precisely the time when a buy and hold would have become very profitable indeed." (Mark Hulbert, writing in Forbes, November 18, 1996)
The standards for success are too high in the market timing game. Any market timer must get every call right, or else he or she is left in the dust. Elaine Garzarelli called two crashes in advance but the one she called that didn't happen-in 1996-knocked her out of the sudden death playoff game.
Dan Sullivan, editor of The Chartist, has usually been right in his market timing signals, ever since founding service in 1969. After an exceptional 25-year run, he turned prematurely bearish in April 1994, with the Dow around 3600.
Such is the all-or-nothing, sudden-death world of market timing. You are not allowed to make even one big mistake in market timing....
-- posted by KLR
» radiodude - Re: Re: The Promise and Peril of Market Timing
In response to message posted by SteveT:on the other hand, it may be possible to determine when the entire market seems overvalued and when it seems undervalued.
For example, I think many people saw that bonds were overvalued a month ago.
more madness of crowds.
-- posted by radiodude
» axolotl - Never Mind Timing.........
just give me a method for determining the right sector at the right time. I've watched the performance of the Fidelity sector funds for years and if you could just figure out which ones(market sector) are going to be the best performer, you would soon own the stock market. Right now for instance, the tech sector is up maybe 40% plus with Intel nearly doubling off its low - someone, no names here, could easily be up 40% plus due to being in the right sector.-- posted by axolotl
» Kirk - Re: Never Mind Timing.........
In response to message posted by axolotl:Why try to time the market? Just buy good companies, take some profits when up, buy some extra shares when down and you get returns like I do.
It is funny that it sounds so easy, but buying through the fear when all are selling and taking some profits when up along with buying good businesses (for the most part... I have my fair share of turkeys) works well for me. SteveT has subscribed since I started to offer the newsletter here and he should be able to verify that I am not making this up or leaving stuff out. Even I have a hard time believing my results, but I look in my personal account and smile. Also, I track my results on BOTH Excel and Quicken so I have a double check to make sure the numbers are correct.
Little bit of timing... like 10% cash to bonds at once or 10% from stocks to bonds sure, but to do these big moves of 25 to 100% of a portfolio some talk about seems plain reckless to me.
Kirk's Newsletter performance vs the S&P500
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-- posted by Kirk
» Kirk - Re: Re: Re: Never Mind Timing.........
.In response to message posted by axolotl:
It is Labor Day and you are up nearly 50% - I admire your discipline not to celebrate big time.
Thanks. I sure feel loads better than I did when the market was bottoming last Fall. The shrinks say losses feel much worse than gains and we had three tough years where I lost money in two of the three.
Perhaps I am just cautious knowing how large these bear market swings can be? Warren Buffett should give one of his employees a few mill and tell him to follow your method. I've wondered why I have not been approached directly by any money managers, but I think many of them do use what I do but with ETFs rather than small and mid cap stocks. My method would not work for the same level of gains for large amounts of money because taking a 5% of portfolio position in a small cap stock would buy all the shares in the company for these billion dollar funds. Part of what I do is buy these small company shares when people are throwing them out with the bath water. Taking a small position then hardly moves the price. OTOH, I do have many new subscribers that have never posted here on this site so perhaps some of them are from big money firms just watching to see if I do what I claim? I have had a couple of firms suggest I get a Series-7 so I can work for them handling money but I like to do new things and that has been done. I am looking into setting up a way to apply my "method" to a basket of EFTs or index funds along with how to manage and charge for it. Who knows where it will go but I'd love to be able to undercut Schwab, Fidelity and Vanguard on management fees. I think some of my ideas will get folks over their natural and deserved distrust of having any firm that sells funds also tell them what funds to buy and sell. Maybe someday I'll have some interesting news to share? FWIW, I got several of my ideas on how to do what I do by reading articles telling us why you want index funds because of what managers of large money can not do. I read the articles as guides to what managers of small amounts of money (like under $100M) can do to beat the markets over the long haul. It is helpful to be a contrarian! LOL Finally, if I get too cocky, I know it will be thrown back at me so I try to just present the results and not call others idiots or whatever for not getting similar results. I am full aware that even with the best TA and FA, probably 1/3rd of the returns for small amounts of money (under $100M) has a great deal to do with luck. I do think some of us adjust to bad luck better than others (like how I made some of my WCOM losses back and how I didn't let those losses deter me from applying my method to my other picks in the sector where I used CACS to make back all the losses and perhaps much more. )
Date Kirk S&P500 Delta
2003 YTD +48.5% 15.2% 33.3% as of 8/28/2003
2002 (21.2%) (22.1%) 0.9%
2001 1.3% (11.9%) 13.2%
2000 (11.5%) (9.1%) (2.4%)
1999 117.0% 21.0% 96.0%
I THINK we are seeing 1999 all over again where the "summer/Fall weakness" most talk about manifests as a sideways correction for the S&P500 and steady gains for the Nasdaq. So far, this has been exactly what has happened.
-- posted by Kirk
» KLR - Re: Re: Re: Re: Never Mind Timing.........
In response to message posted by Kirk:.
I know you don't believe in marketiming and as you know, neither do any of the so-called recognized experts, e.g. Bogle, Bernstein, Malkiel, etc etc.
All of their works eschew marketiming; however, every single study, book or article by these folks also dismisses individual stock selection along with marketiming.
In a recent interview, Bernstein says...
Mathematics is the language of investing," says Bernstein. The odds that any given fund manager will beat the market 12 years in a row are minuscule. But among thousands of managers, the odds that someone will beat the market 12 years in a row are close to 100%--and Legg Mason Value Trust's Bill Miller just happens to be that one. "I think the guy is a competent securities analyst," says Bernstein, "but he's also very lucky."
I know that you are saying that it is possible to beat the market over the long haul because you are not hampered by size constrictions of the average money manager, i.e. you are free to invest in small float, (pardon the expression) penny stocks.
You are, of course, too modest to say that you possess superior stock picking abilities.
You seem to agree with the experts on the folly of marketiming, but not the folly of individual stock picking.
-- posted by KLR
» KLR - Re: Re: Re: Re: Never Mind Timing.........
In response to message posted by Kirk:Here's an article re:
Asset allocation with ETFs
Best solution when market timing gets too risky
By Paul B. Farrell, CBS.MarketWatch.com
Last Update: 12:02 AM ET Aug. 21, 2003
LOS ANGELES (CBS.MW) -- If I have to read another breathless column on the collapse of the 12-year bond market I'll scream. What's a passive investor (that's most of us) supposed to do? Dump bonds, rush into stocks, and start timing the market?
The solution: Forget about timing the market. It's irrationally controlled by unpredictable world events and the inane bumbling of domestic politicians. Instead, develop a well-balanced portfolio using asset-allocation principles that have nothing to do with short-term breaking news.
Here's my simple, long-term, portfolio-building strategy, using exchange-traded funds. ETFs are index funds that have expenses lower than mutual funds, although you have to pay broker's commissions to buy, sell and trade them. Still, they are becoming increasingly more popular for passive investors, with over $100 billion in assets:
The first step is to allocate your bond ETFs. In most how-to discussions of ETF portfolio asset allocations, bond-index ETFs get little emphasis when they should be a primary focus: You still need fixed-income bond funds in order to build a successful portfolio.
Whether you're a 20-year-old college grad or a 60-year-old retiree, make darn sure you focus on fixed-income funds before equities. Buy your stock ETFs only after you allocate and purchase your bond ETFs.
Bond ETFs are newer to the market. Barclay's iShares has several solid ones, including short-, intermediate- and long-term Treasury bond ETFs, and one corporate-bond ETF:
The four iShare ETFs are Lehman 1-3 Year Treasury Bonds (SHY: news, chart, profile), Lehman 7-10 Year Treasury Bond Index (IEF: news, chart, profile), Lehman 20+ Year Treasury Bond Index (TLT: news, chart, profile) and the iShares GS $ InvesTop Corporate (LQD: news, chart, profile).
Keep in mind that you can invest directly in bonds or bond funds, rather than these suggested bond ETFs, and just use ETFs as a substitute for your stock ETFs or stocks.
Next, add stock ETFs
Once you have locked down your fixed-income allocation, it's time to diversify the remainder of your money across the stock ETFs. For example, if you have a $100,000 portfolio and you put $40,000 in fixed-income bond ETFs, then you'll be allocating the remaining $60,000 to stock ETFs.
Here's one recommended allocation for that $60,000: Put 50 percent in large-cap stocks, 30 percent in midcaps and small caps, and 20 percent in international funds. If you're so inclined, you can take 5 percent out of one category and move it into sector ETFs.
The biggest large-cap stock ETF is the Spider or Standard & Poor's Depository Receipts (SPY: news, chart, profile). The Spider tracks the S&P 500 index just like an S&P 500 index mutual fund. There's also a Barclays iShares S&P 500 (IVV: news, chart, profile), and Value (IVE: news, chart, profile) and Growth (IVW: news, chart, profile) versions of the S&P 500.
And if you prefer the blue-chip Dow-30 Industrials, buy the "Diamond" (DIA: news, chart, profile). Other large-cap variations include the Fortune 500 Index Tracker (FFF: news, chart, profile) and State Street's streetTRACKS U.S. Large-Cap Growth (ELG: news, chart, profile).
For midcaps, grab the S&P 400 Mid-Cap Spider (MDY: news, chart, profile) and the iShares S&P Mid-cap 400 (IJH: news, chart, profile). For small caps, try Barclays iShares Russell 2000 (IWM: news, chart, profile) and iShares S&P Small-Cap 600 (IJR: news, chart, profile). There are also growth and value ETFs for both midcaps and small caps.
Alternatively, there's the Vanguard Extended Market VIPER (VXF: news, chart, profile), which represents the entire market less the largest 500 stocks. You can also keep-it-simple and invest in Vanguard's Total Stock Market VIPER (VTI: news, chart, profile), which tracks the Wilshire 5000.
For your international allocation consider iShares S&P Global 100 (IOO: news, chart, profile). If you want exposure in the developed markets, try iShares S&P Europe 350 Index (IEV: news, chart, profile), iShares MSCI UK Index (EWU: news, chart, profile) or iShares MSCI Japan Index (EWJ: news, chart, profile).
There are lots of smaller regional and individual-country ETFs, but they're highly volatile and far riskier for a passive investor, so stick with the developed nations and regions.
Remember, you'll pay broker's commissions every time you buy or sell an ETF, so be careful; the advantage of the lower ETF expense ratios can be easily wiped out by trading.
If you can't resist trading occasionally, sector ETFs offer temptation: The most popular are the Spiders and Nasdaq Qubes (QQQ: news, chart, profile), which together make up 60 percent of the total ETF market.
Sector selections
There are more than 100 other smaller sector ETFs. Most of them have assets under $1 billion, plus they're more volatile than index mutual funds. Here are the five most popular ETF sectors that you're likely to pick from:
Technology. SPDR Technology (XLK: news, chart, profile), iShares Dow Jones US Tech Index (IYW: news, chart, profile) and iShares Goldman Sachs Technology (IGM: news, chart, profile). Also look at the Merrill Lynch HOLDR series: Software (SWH: news, chart, profile), Wireless (WMH: news, chart, profile), Semiconductors (SMH: news, chart, profile), Telecomm (TTH: news, chart, profile), Broadband (BDH: news, chart, profile) and Internet (HHH: news, chart, profile).
Healthcare. iShares Dow Jones US Healthcare (IYH: news, chart, profile), iShares Nasdaq Biotech Index (IBB: news, chart, profile), Holders Pharmaceuticals (PPH: news, chart, profile) and Holders Biotech (BBH: news, chart, profile).
Financial. Financial Select Sector SPDR (XLF: news, chart, profile), iShares Dow Jones Financial Services (IYG: news, chart, profile) and iShares Dow Jones Financial Sector (IYF: news, chart, profile).
Sector SPDRs: Basic Industries (XLB: news, chart, profile), Consumer Staples (XLP: news, chart, profile), Consumer Services (XLV: news, chart, profile), Financials (XLF: news, chart, profile), Cyclical/Transportation (XLY: news, chart, profile) and Utilities (XLU: news, chart, profile).
Real estate. Consider iShares Cohen & Steers Realty Majors (ICF: news, chart, profile), iShares Dow Jones Real Estate (IYR: news, chart, profile) and streetTRACKS Wilshire REIT Fund (RWR: news, chart, profile).
The bottom line for an average passive buy-and-hold investor: ignore all the breaking news about dumping bonds and jumping back on the stock bandwagon and focus on your long-term asset allocations. You'll sleep better.
-- posted by KLR
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