Market Timing: Should You Attempt It?
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- Kirk
- KLR
- SteveT
- Kirk
- KLR
- Kirk
- bob90245
- Will_L
- Kirk
- DennisL
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» Kirk - Re: Top market-timing system now bullish
In response to message posted by KLR:I know some of you nay-sayers will point out that it returned only 13.9% over a buy and hold return of 12.7%...but, you're only in the market one-third of the time
You know us well! 
To be sure, the system is for short-term traders only. It involves around 17 round-trip trades per year, for example.
For many of us with significant assets in taxable accounts, this system would be a huge loser compared to buy and hold when you are working with >30% Fed tax hit and 9.3% CA taxes to pay each year.
-- posted by Kirk
» KLR - Can you make the case for timing?
.Can you make the case for timing?
Despite market gestalt, timing still a loser's game
By Paul B. Farrell, CBS.MarketWatch.com
Last Update: 12:19 PM ET Sept. 2, 2003
LOS ANGELES, CA. (CBS.MW) -- Summer is over. The kids are in school. Football's finally here. The fall television season's heating up. The economy's recovering. Consumer confidence is rising. Third-quarter profits are estimated to rise 14 percent; 20 percent is possible in the fourth.
Folks, we are heading into a hot market. Time to jump on the bandwagon. Win back some of those big losses from the past three years.
But how? What's the best way? Peter Bernstein, author of "Against the Gods: the Remarkable Story of Risk" and a respected market commentator, says the answer is market timing.
Bernstein is just one of many experts who sees low returns and modest growth for the rest of the decade. And he's come to a heretical conclusion: That active timing and trading makes more sense than a passive buy-and-hold strategy, and may be the only way to beat this kind of volatile, unpredictable market.
Dump modern portfolio theory?
Modern portfolio theory is the foundation of virtually all institutional-investment strategies for the past few decades. The theory simply says that focusing on your portfolio, not your stock picking, wins the investment game.
But Bernstein would say "get rid of the extra freight of long-term optimization and let short-term forces play the dominant role." In other words, you should adopt a new core strategy, you should start playing the market, you should become a short-term market timer and get into active day-trading.
Vanguard founder Jack Bogle disagrees vehemently: "Beating the market before costs is a zero-sum game." There's a buyer for every seller. So losers balance out winners across all market trades. In fact, "the odds of making the right decision are, because of costs, even less than 50-50."
The great paradox of investing is that the very costs incurred by those managers who would help investors to beat the market, themselves constitute the reason that the managers as a group are destined to fail at the task, Bogle says.
"A lifetime of experience in this business makes me profoundly skeptical of market timing. I don't know of anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don't even know of anyone who knows anyone who has timed the market with consistent, successful, replicable results," he said.
Cost may be the only thing that does matter. And you don't have to take it from Bogle or Vanguard. A study by the Financial Research Corporation prepared for industry insiders concluded just that.
FRC's research tested seven common predictors of future performance -- Morningstar ratings, past performance, the expense ratio, turnover, manager tenure, net sales and asset size -- and four risk/volatility measures -- alpha, beta, standard deviation and the Sharpe ratio.
All but one predictor failed. Morningstar ratings are "not very effective as a guide in finding funds with above-average future performance potential." The Sharpe Ratio, alpha, beta and standard deviation (all those fancy Nobel prize-winning measurements of risk and volatility) also had no predictive value of a fund's future performance.
The expense ratio is the only reliable predictor of future performance. And that's been Bogle's point for the past few decades, a point market-timing advocates like Bernstein seem to ignore.
"In the final analysis," concludes the FRC study, "your best strategy is still to focus on portfolio asset allocation, diversification and risk assessment, not specific funds, it's that basic." In short, avoid market timing like the plague, it's "a loser's game."
Rebalancing may be timing in disguise
Watch out folks, even your well-meaning rebalancing may be a form of market timing in disguise, which can sabotage the best of intentions.
Take long-term rebalancing, for example, where an investor is convinced that a long-term bull-bear cycle has run its course. I see this as a variation of Warren Buffett's first rule of investing: Never lose money. You simply take your profits and go to cash at the peak of a long-term cycle. But still, you have to be savvy enough to know when the long-term cycle is about to crash and get out.
Lots of luck, folks. The last opportunity for strategic timing was early 2000, when the Nasdaq was over 5000 and P/E ratios were so out of whack they were screaming "get out." But few listened. I only know of one astute investor, an economist, who heard and heeded the call, and dumped stocks for bonds. And now, 40 months later, as the cycle turns again, he's recommending a return to the market. But this time, he could be wrong.
In the final analysis, this kind of long-term rebalancing will fail for most investors because the market is unpredictable.
More frequent short-term rebalancing can also become a form of market timing. When investors rebalance they should, theoretically, be bringing their actual market allocations (which have drifted) back in line with the long-term asset allocations of their ideal portfolio, one that makes most sense for their age, risk tolerance level and lifestyle.
Many investors, however, use periodic rebalancing as an opportunity to adjust the asset allocations of their ideal portfolio in order to take advantage of opportunities they see in the current market.
No rebalancing, no timing, no trading
The truth is, if you have wisely worked out portfolio allocations, you don't have to do much rebalancing. There's a classic Schwab/Morningstar study on rebalancing that essentially concluded the differences in returns between annual rebalancing versus waiting three years is less than one percent.
To their credit, Bernstein and other market gurus have forced us to reexamine our investment strategies and priorities by challenging the very foundations of Modern Portfolio Theory.
But that hasn't changed our minds. Forget market timing, in any form. It's a very risky game passive buy-and-hold investors should avoid like the plague.
-- posted by KLR
» SteveT - Re: Can you make the case for timing?
In response to message posted by KLR:"There's a classic Schwab/Morningstar study on rebalancing that essentially concluded the differences in returns between annual rebalancing versus waiting three years is less than one percent.
To me there is no point in rebalancing at given times makes no sense. Why do it if you are within 1% or 2% of your target just because the calendar says so? Now, rebalncing when your allocation is 5% or more out of whack, now that makes sense imo. That could be the other side of the coin. It would be interesting to see a study on that. It may out perform by 1% or so? Wonder if Schwab or Morningstar would take that on?
-- posted by SteveT
» Kirk - Re: Re: Can you make the case for timing?
In response to message posted by SteveT:Bingo Steve! We have a winner!
Of course it helps to have your total portfolio in a computer so it updates automatically and tells you what your allocation is (I have this in EXCEL).
Lets say you have a $1M portfolio at 50:50
If it is out of balance by 1%, at 49% vs 51% you are still talking $10,000 dollars that you can now apply to an area in that is showing weakness. the percentages can seem small but they do add up over time to significant real dollars.
-- posted by Kirk
» Kirk - Re: Re: Re: Re: Can you make the case for timing?
In response to message posted by KLR:You get much more bang for the buck if you let it add up some, but the whole idea is you can rectify noise to make money. a $15 commission to move $10K won't effect the results.
Of course, some might wait for the numbers to get larger, but Steve's point is valid and very well made.
If your portflio gets to 45:55 and your target is 50:50, then rebalance when it happens rather than wait for the end of the year when it might be at 48:52. This allows you to better capture big down and up periods.
-- posted by Kirk
» bob90245 - Re: Re: Re: Re: Re: Rebalancing
In response to message posted by Kirk:I also think 5% is a good threshold for rebalancing. Use these numbers for an example:
January 2003
$100,000 stocks
$100,000 bonds
Asset Allocation = 50:50
Not a prediction, but lets say stocks rise 20% and bonds stay flat. Then,
January 2004
$120,000 stocks
$100,000 bonds
Asset Allocation = 55:45
Then we rebalance to the target 50:50 allocation:
$110,000
$110,000
You see that we have to have a bull market in stocks (or a bear market in bonds) to trigger the 5% rebalancing.
-- posted by bob90245
» Will_L - Re: Re: Re: Can you make the case for timing?
In response to message posted by Kirk:"Lets say you have a $1M portfolio at 50:50
If it is out of balance by 1%, at 49% vs 51% you are still talking $10,000 dollars that you can now apply to an area in that is showing weakness. the percentages can seem small but they do add up over time to significant real dollars. "
I'm just an ole country boy but how do we devine that moving 10 grand from the portion of our asset allocation that has moved up sooner into the portion that has gone down or languished is going to add up to "significant real dollars".
If talking about allocating between fixed and equities, logic would tell you that the longer you wait to rebalance over time, the more you will make. More times than not the equity portion will out perform the bond portion of your portfolio so jumping to move into fixed often is shooting yourself in the foot.
Likewise if one sees a stock like Walmart over performing and decided to move into let's say Lu and WCOM a couple years ago, how did they have "significant real dollars" adding up?
I look at asset allocation as a general guideline to prevent a huge downside risk, not to increase performance. I'd guess the more one fiddles, over the long haul, the more they wished they would have waited. But then again with me procrastination is a participant sport. More power to those who can fiddle their way to riches.
-- posted by Will_L
» Kirk - Re: Can you make the case for timing?
In response to message posted by Will_L:Good points. The idea of asset allocation with frequent rebalancing is much better in a somewhat flat market.
The theory says that you want all assets in stocks (or a winning lotto number) if you have a long enough time frame and can stomach the fluctuations. Most nearing retirement don't want that much fluctuation if they are living off their portfolio so they lower allocation to get nice, fixed stream of income.
Myself, I've been fiddling with a "sliding allocation." For the example we are talking about one might let the allocation drift between 45:55 and 55:45 so you can capture a trending market and you don't start buying too soon after a market reversal. For myself, I'm experimenting with allowing allocation to range between 70:30 and 80:20. Ideally I'd like to be 75:25 with 2 or 3 yrs cash flow needs in money fund or ST Bonds.
I think the key point is to have some sort of a "system" that you stick to so you are not capitulating at the bottom of bear markets or getting too agressive at the top of bull markets. If folks concentrate on their asset allocation, it usually has them buying when low and selling when high which is good.
-- posted by Kirk
» DennisL - Re: Re: Can you make the case for timing?
In response to message posted by Kirk:I don't have a hard and fast rule for when to rebalance my portfolio. If my actual percentages have strayed about 3% or more from my targets, and I feel that one asset class has had a real good run lasting several months or so, as the stock market has for the last six months, then I'll go ahead and rebalance. As a matter of fact, I did it today in my retirement plans at work. My actuals were about 4% off my targets and I feel that the current run in the stock market is about to peter out, so I rebalanced. It didn't cost me a dime to do it either because I did it in retirement accounts, through Vanguard's absolutely wonderful and easy-to-use Web site. You just go there, log in to your plan accounts, click on the "rebalance" button, and it does the math and all the rest for you.
-- posted by DennisL
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