MARKET TIMING
What Market Timing Is - And Isn't
Market timing is supposed to be great at reducing your risk while letting you profit in the bull moves, but is it all it's cracked up to be? This market timer discusses the pros and cons.
Market timing -- and market timers -- are often treated in the media as barely a step above snake-oil salesmen. It's easy to become defensive in response. But confession is good for the soul. So here's an insider's look at what timing is -- and isn't.
I could claim that market timing has a big impact on long-term returns. But it doesn't; timing is much less important than asset allocation. In the long run, a broadly diversified buy-and-hold equity portfolio has pretty high odds of achieving a 12% compound return. Timing may improve that - but you can't count on it. The biggest way timing adds value is by offering a smoother ride, trying to avoid or minimize interim losses that result from volatility.
Timing should get more respect, but it doesn't. A buy-and-hold money manager doesn't have to do a thing beyond a little hand-holding now and then. But a manager who uses market timing monitors a client's portfolio every day. Yet in the end, no matter how hard a professional timer works to reduce risks along the way, the results are still measured by the final tally. After the fact, interim reduction of risk doesn't count for much.
This is regarded as blasphemy among timers, but I believe buy-and-hold is an excellent approach to the market for those who can -- and will -- actually do it. I just can't do it myself. Personally, I don't have much tolerance for risk. I don't have any anxiety about my own investments, but I hate to lose even a dollar of my clients' hard-earned money. My life would be easier if I trusted the market, but I don't. The only way I can sleep at night is knowing that I have multiple mechanical timing systems poised to protect my clients' capital every business day.
Timing would be so much easier to sell if I could position it as what most investors want: a strategy to beat the market. But in a bull market, timing is likely to underperform. Frankly, I don't think just beating the market is much of a goal. In a year when the Standard & Poor's 500 index lost 20%, some managers might pat themselves on the back if they lost "only" 10% of their clients' money. I think most market timers would be massively disappointed if they lost 10% of any client's money using timing with traditional strategies. Timers typically underperform in the good years and hope to reduce losses in the bad years. But in a bull market, that's sure a hard sell!
Paul Merriman is editor and publisher of FundAdvice, at https://www.FundAdvice.com.
Excerpted from an article originally published in the August 1999 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 1999, Technical Analysis, Inc.
Return to August 1999 Contents