Market Timing: Should You Attempt It?
Read the article this discussion is about
- Rande
- Will_L
- Mark_J
- SteveT
- KLR
- mdorsey
- JenL_2
- soonertimer
- mdorsey
- Jonathon
This archived discussion is "read only".
For the corresponding "live" discussions, post in the active topic forum here.
« Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Next »
» Rande - Re: Re: Re: Re: Re: Vanguard says nay to market timing way:
In response to message posted by SteveT:No argument here. Note the odds the market timer is up against just to BREAK EVEN, as Charles Ellis points out below:
"Despite the enticing appeal of reducing market exposure by astute sales when securities appear to be overpriced, and boldly reinvesting when securities appear to have declined to attractive low levels -- selling high and buying low -- the overwhelming evidence shows that market timing is not an effective way to increase returns for one dour but compelling reason: on average and over time, it does not work. The evidence on investment managers' success with market timing is impressive -- and overwhelmingly negative. One careful study of market timing concluded that an investment manager would have to be right on his market forecast 75 percent of the time for his portfolio just to break even after measuring the costs of mistakes and the costs of transactions. The case for not attempting market timing is partly that the history of many, many investment managers shows that the market does as well when they are heavily in cash as it does when they are fully invested -- and vice versa. Attempts to switch between stocks and bonds, or between stock and cash, in anticipation of market moves have been unsuccessful much more often than they have been successful.” [Charles D. Ellis, How to Win the Loser's Game]
-- posted by Rande
It's about the single best description of the difficulty involved in consistantly timing the market I've seen. Thanks
» Mark_J - Re: Re: Re: Re: Re: Vanguard says nay to market timing way:
In response to message posted by SteveT:Of course, that "box with 4 outcomes" describes a whole lot of things. Like idling in front of a stop light.
1. Light stays red, foot stays on brake.
2. Light stays red, foot steps on gas.
3. Light turns green, foot stays on brake.
4. Light turns green, foot steps on gas.
So, in those terms, every time you see an intersection, there's only a 50% chance you'll do the right thing and get to work okay. Makes driving seem pretty risky. Heck, 25% of the time at a stop light, you'll be stepping on the gas!!!
Hardly seems worth driving. Take mass transit. Uh-oh, another "box with 4 outcomes" presents itself.
1. Purchase ticket, get on mass transit.
2. Purchase ticket, don't get on mass transit.
3. Don't purchase ticket, get on mass transit.
4. Don't purchase ticket, don't get on mass transit.
Only 25% chance of getting to work every day via mass transit. If you drive to work, only a 50% chance of doing the right thing at every intersection - and there are many intersections along the way.
I mean, shoot, might as well just stay home in bed!!! But, I'm sure at home, there are more "boxes with 4 outcomes" all over the place.
Lord help us all.
-- posted by Mark_J
» SteveT - Re: Re: Re: Re: Re: Re: Vanguard says nay to market timing way:
In response to message posted by Mark_J:Mark, Yes life is full of risks. It may interest you to know I am a bus driver and so far (knock on wood) in my 22+ year career no accidents. What does this have to do with "market timing?"
I wonder how many times daily vehicles in this Nation pass through intersections with out crashing? Pretty small percentage I would hazard a guess, way under 1%. I can live with odds that heavily in my favor.
-- posted by SteveT
» KLR - The more you trade, the less you earn
The more you trade, the less you earnRecovery's coming -- 5 reasons to buy-and-hold
By Paul B. Farrell, CBS.MarketWatch.com
Last Update: 4:31 AM ET Aug. 6, 2001
LOS ANGELES (CBS.MW) - Varoom. VAROOM! Lately I feel like a crew-chief in the Indianapolis 500 pits. Or the NASCAR 400. Heart pounding. Tension mounting. Engines revving. Pace car positioned. Starter unfurling the green flag. VarooOM!
Investors are impatient, idling, anxiously waiting for "The Recovery" to begin. Have been for some time. Spanking's strong. But little new investing. Investors are getting real antsy.
Well actually, only certain kinds of investors - the active-investors are anxious to leap back into action and race full-throttle around the oval track, adrenaline-pumping. At 200 mph! Marking time is no fun for these macho guys. Active-investors miss chasing the bulls. Racing makes you feel alive.
Especially the high-octane NASCAR Qubes - ooops, sorry, I meant the NASDAQ Qubes (QQQ). They're tuned, greased, gassed and ready to roar. In fact, all the exchanged-traded funds (ETFs) are at the gate, revving up, ready to kick in high-gear, waiting for the flag, hoping to accelerate back into the good-old-days of a nineties-style bull market.
Successful traders win in bear markets too
Of course, if you really are one of the million or so ultra-sophisticated traders who know how to successfully make money in bear markets as well as bull, you've been selling short, trading ETFs and their derivatives since the tech crash, over the past eighteen months. Zipping in-and-out of those 15-minute spins around the track. And not just Qubes. Other indexes are also burning rubber.
For example, look at the volume of the S&P Midcap 400 (MDY), the DOW Diamonds (DIA), as well as the SPDR 500 (SPY). They're up quite a bit. So is the hot iShares Russell 2000 Value Index (IWN). In fact, the Qubes' volume is up considerably for a bearish 2001 compared to the bullish go-go days of 1999 and the red-hot Nasdaq. Same with the Diamonds and Russell.
Why is active-trading a losers game?
However, if you're one of the vast majority of investors - the other 82 million of the total 83 million fund investors who are basically passive, buy-and-hold investors - the start of "The Recovery" race hopefully won't convert you back into an active trader, trading ETFs, chasing hot stocks and searching for the next triple-digit fund.
Hopefully you learned your lesson, especially if you had a tech-heavy, misaligned portfolio that dropped 25-50 percent in the tech arena, trading is a losing game got the average passive investor. Yes, I know, there is a small - very small, less than a million - number of active-investors in America who may make money trading. But just in case you ever think of jumping into trading, here are five powerful reasons why it's a bad idea:
Fact #1: The stock market is irrational
Economist Jeremy Siegel studied 120 of the biggest up and biggest down days in the history of the stock market. And guess what, in only 30 of the "big-move" days could he find any reason for the action.
In other words, 75 percent of the market's big gyrations are irrational and unpredictable, which makes market-timing so hazardous, except for an elite group of maybe a half million, or less, full-time professional traders. So you're better off not trying to guess the unguessable.
Fact #2: The more you trade, the less you earn
That's right, passive investors win the race, like the slow-moving tortoise. Behavioral finance professors Odean and Barber of the University of California Davis researched 66,400 investors between 1991 and 1997.
They concluded that two things resulted in substantially reduced returns - lousy stock-picking and transaction costs. In fact, the most active traders (averaging 258 percent turnover) earned 7 percent less annually than buy-and-hold investors (2 percent turnover), That's 18.5 percent for the gunslingers versus 11.4 percent for the sideline-sitters.
In addition, the professors' research also showed that another group of investors who converted to online trading say their returns drop from beating the market by two percent before going online to falling under the market by three percent once online. In short, the Internet makes it easier to lose as well as win, too easy.
Here's even better proof. Joe Ricketts, Ameritrade's founder once told Fortune: "The best thing, really, for an investor to do is buy a good company and hold it ... Trading often and heavy is not something that makes you a lot of money. That's contrary to my own interests, but it is the truth."
Fact #3: Investors buy "buy-high, sell-low" - and lose
You heard me, that's the conclusion of a Morningstar research study, most mutual fund investors got the investment advice of the old masters upside-down, they "buy-high, sell-low." Mutual fund investors are bad at market timing, they go in at the wrong time (the top), and get out at the wrong time (the bottom).
First greed creates a buying frenzy, at the top of a cycle. Then fear grabs the sellers, triggering sales at the bottom. They react at the worst possible times. Either way, they lose. Leave market timing to the so-called experts in that voodoo game - for the average investor, it is a waste of time, and your money.
Fact #4: Overly-confident, we deny and lie about losses
Not long ago Money magazine reported on a behavioral finance study that 88 percent of all investors experience a phenomenon psychologists call "optimistic bias," too much confidence. As a result, we often make bad investment decisions - then we hide the facts and lie to ourselves about how bad it is.
More specifically, over half of these overly-confident investors in the study who believed they were beating the market were actually trapped in a game of self-deception. It turns out they were, in fact, under-performing the market by anywhere between 5 percent and 15 percent below the S&P 500.
Fact #5: Even winning traders don't win much
Trading isn't the get-rich-quick scheme that the Wade Cooks of the world would make you believe. Oh sure, you can go online and trade for seven bucks a pop, maybe even zero brokerage fees, if your account's active enough. But we already know, the more you trade the less you earn.
But suppose you are one of the lucky day-traders who's making a living at the game. Be ready to give up your day job that may have a 401(k) and a vested pension. It takes full-time concentration. The successful ones live, breath, eat trading. While the average passive long-term investor need only rebalance, buy and sell every 15 weeks, a short 15 minutes will seem like an eternity.
And successful traders who do it make the commitment full-time rarely make more than $100,000 a year, as I recall from a study a couple years ago. In fact, the average is under $50,000 annually. Moreover, it's a solitary life. Addicting. Easy to burn out. And easier to make mistakes and lose it all fast in one slip-up, after building a sizeable nest egg over time.
Bottom line - the more you trade the less you earn
"Market timers, if they don't die broke, rarely beat the market," says David Dreman, author of the New Contrarian Investment Strategy. "Why don't more people beat the market? The answer is simple," says Dreman. "They lack discipline ... and love to follow the crowd ... almost always persuaded that they have seen clearly into the future ... Most of the time they prove wrong and it costs heavily."
There is a better answer - buy-and-hold. So when "The Recovery" does finally start, don't even think about trading. Instead, stick to your buy-and-hold strategy. Rebalance your portfolio every 15 weeks rather than get caught us in the insane world of trading, where 15 minutes is an eternity
-- posted by KLR
» mdorsey - Re: The more you trade, the less you earn
In response to message posted by KLR:"There is a better answer - buy-and-hold. So when "The Recovery" does finally start, don't even think about trading. Instead, stick to your buy-and-hold strategy. Rebalance your portfolio every 15 weeks rather than get caught us in the insane world of trading, where 15 minutes is an eternity "
15 weeks? A modest form of market timing investing as opposed to day trading.
-- posted by mdorsey
» JenL_2 - Resist The Call of the Bears
In response to message posted by KLR:KLR - Thanks for that level-headed article by Dr Ferrell. Here's another good one from Jonathan Clements Getting Going column in 8/7 WSJ:
As Stocks Fall, Resist The Call of the Bears
Cub investors are throwing in their lot with the bears.
by Jonathan Clements
In recent weeks, I have received a flurry of e-mails from ordinary investors asking about market-timing strategies, selling covered call options and shorting stocks. This worries me.
"Every time the market goes down, shorting becomes a popular topic again and articles on market timing start appearing," says Chuck Zender, portfolio manager of Grizzly Short Fund in Minneapolis. "If you went back and looked at 1994 and 1990, you would have heard the same thing. People always talk about what worked best over the past 12 months."
But is it smart to bet on further market turmoil? I don't think so. Such bets can go badly awry.
Capping Your Gains: Got a stock that you don't think is going anywhere? The temptation is to sell a call option against your position.
The call option commits you to selling the stock at a designated "strike price" any time between now and when the option expires in, say, 10 weeks. Thus, if the stock climbs above the strike price, you will lose out on this additional appreciation. In return, you might collect a premium that is worth a few dollars a share and possibly more. "It's like an extra dividend," suggested one of my recent e-mail correspondents.
But that extra dividend could come at a huge cost. If stocks rally, folks who have sold covered calls may find that they suffered through the bear market, only to miss the market rebound.
Don't think that will happen? Clearly, whoever bought your call option disagrees. Remember, options investing is a zero-sum game. For every winner, there is a loser. In fact, because of the trading costs involved, options investors collectively lose money.
Covered calls are often sold by folks who are happy with their stock holdings, but want to earn a little extra money in a lackluster market. Today's sellers, however, also seem to include disgusted technology investors, who can't bring themselves to unload their battered holdings and instead are trying to recoup some of their losses by collecting option income.
That doesn't look like a very good bet now. "Options premiums are about as low as they've been all year in the tech sector," says Bernie Schaeffer, chairman of Schaeffer's Investment Research in Cincinnati.
Mr. Schaeffer is a fan of options investing. But he argues that covered calls are "kind of a cop-out. Either the stock should be held or it shouldn't. If you shouldn't own it, then sell the darn thing."
Shivering on the Sidelines: It seems sensible enough: Sell your stocks, stick the proceeds in cash and wait for the storm to pass.
You can see signs of such market timing in mutual-fund data from Washington's Investment Company Institute. Most stock-fund investors have shown remarkable tenacity through the decline. Over the 10 months through June, for instance, investors shoveled a net $101 billion into stock funds.
But if you dig into the numbers, you can spot the market timers at work. Timers typically take advantage of their telephone switching privileges, exchanging out of stock funds and into bond and money-market funds, with a view to shifting back later. Indeed, over the 10 months through June, there was a net $13.6 billion exchanged out of stock funds.
These folks may be making a big mistake. For proof, consider some numbers from Mark Hulbert, editor of Hulbert Financial Digest in Annandale, Va., a monthly publication that tracks the performance of financial newsletters.
For the 10 years through June 30, Mr. Hulbert has results for 72 newsletter market-timing systems. Of these, just five outpaced the Wilshire 5000 index of almost all regularly traded U.S. stocks. Even after adjusting for risk, only 16 edged ahead of the Wilshire 5000.
"This is right in line with everything you see in the market, whether it's mutual funds, professional money managers or newsletters," Mr. Hulbert says. "It's the 80-20 rule. Over long periods, you can expect 20% will benefit by deviating from a buy-and-hold strategy and 80% will not."
Losing Your Shorts: When you short a stock, you sell borrowed shares, with the idea of buying back the stock later at a lower price. That might seem like an attractive proposition right now. In truth, it is an extraordinarily dangerous strategy. If the shorted stock takes off, your potential loss is infinite.
It is difficult to gauge how much shorting is going on among small investors. But you can get some sense by looking at short sales that involve odd lots, or trades of less than 100 shares.
According to Birinyi Associates in Westport, Conn., odd-lot short selling has been increasing over the past decade. But the rate of increase accelerated in 1998 and really picked up last year, before falling back somewhat in the last six weeks. Overall short-selling levels on both the New York Stock Exchange and Nasdaq stand at record highs as of the last monthly count.
"The problem with shorting is you can lose your shirt in a hurry," says Ted Aronson, a money manager with Philadelphia's Aronson & Partners. "When the market reverses, these no-brainer strategies are revealed to be brainless."
Subscribe to WSJ Online @ http://www.wsj.com
.......Jen
-- posted by JenL_2
» soonertimer - Re: Re: Re: Re: Re: Re: Vanguard says nay to market timing way:
In response to message posted by Will_L:Greetings Will, it has been over a year since we had a few discussions (civil - I believe) about BB's January call. I was coming from the point of view that "market-timing" has its time and place and that I had already reduced my equity (S&P 500 index funds) asset allocation from appr. 80% to less than 25% in the summer of '99. I had NO desire to remain fully invested in what was clearly (IMHO) a bubble. As an update, I transferred about 1/3 of my cash reserves in March when the S&P was at 1,150 and have been DCA since then and am about 50% in equites. My point is that it is NOT necessary to be "perfect" on either the sell or buy side, IF the markets are clearly over or undervalued. Also, there is obviously a huge difference between day-trading and changing asset allocations (even in a major way).
-- posted by soonertimer
» mdorsey - Re: Re: Re: Re: Re: Re: Re: Vanguard says nay to market timing w
In response to message posted by soonertimer:Good points. Not that the Bashers care. We have already gotten out of stocks near the highs and can reenter as you are to lock in those lower prices if we choose. I have not as yet. So when I do I may do better or worse than you. But BB certainly helped me decide to sell stocks and buy bonds.
-- posted by mdorsey
» Jonathon - Re: Re: Re: Re: Re: Re: Re: Re: Vanguard says nay to market timi
In response to message posted by mdorsey:mdorsey did brinker certainly help you to decide to sell stocks and buy a risker security like the qqqs? he told all of his subscribers to, even the conservative ones. now that's timing. just not good timing i'm afraid
-- posted by Jonathon
« Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Next »
Please follow the guidelines set forth in the Suite101 Posting Etiquette when adding to the discussion.