The Truth About Market Timing

Yesterday in Barron’s, Mark Hulbert asked: “So, How Did the Market Timers Do?“:

“Now is a perfect time to ask these questions: With the stock market back to where it stood in October 2007, the last five-and-a-half years constitute an ideal laboratory in which to judge the success of market timing in the real world. Only after a full market cycle can we tell whether a timer can both get out at tops and get in at bottoms . .

The first lesson that emerges from the HFD data may be obvious, but is worth noting: No market timer called the market top in October 2007 and the bottom in March 2009, if by “called” we mean went completely to cash on Oct. 9, 2007, the exact day of the high, and got back 100% into stocks on March 9, 2009, the precise date of the bear market bottom.”

With all due respect to Mark, he’s doing it wrong.

The data overwhelmingly shows that no one is ever going to make a risk assessment that allows them to top tick on the way out going to 100% cash at the highs and bottom tick at the bottom, going all in. Forget the proverbial typing monkeys writing Hamlet; even a million fund managers over a million cycles might not generate one outcome of top and bottom ticking. And if it did, we know it would be purely random. Perhaps a fairer test to the Timers would be getting out within 10-25% of a peak and getting back in within the same parameters at the bottom. (Hulbert plays with the parameters for timing in the column, but none of the Timers does especially well).

Regardless, that one in a million-million trades misses the point. Individual investors should not market time, but they should be aware of other factors when they make capital commitments.

I prefer to employ Risk Analysis rather than engage in pure Market Timing.

Rather than making a low probability attempt to market time, there are quite a few things other things investors should at least be aware of, rather than attempt to jump in and out:

• What is the overall trend in the market — is it rising or falling or going sideways?

• Are Earnings rising or falling?

• Is my asset allocation percentages appropriate for the current secular cycle?

• How are stocks valuations? Measured by both a simple forward P/E and a longer term 10 year (i.e., Shiller CAPE), are stocks cheap or pricey?

• Am I taking advantage of mean reversion to rebalance my holdings based on asset class?

• Are interest rates rising or falling?

• What do the regular 5%, 10% even 20% pullbacks mean to your portfolio?

• Do I understand that my comfort level about market volatility and risk is typically inverse to present opportunities?

Most people are much better off if they simply do two things: Rebalancing their holdings on a regular basis and changing the tilt of their allocations on rare occasions (i.e., 70/30 to 60/40).

Focus on maintaining an intelligent balance of assets, and leave the martket timing to the newsletter writers. When they get it wrong, they lose subscribers. When you get it wrong, it crushes your retirement plans . . .



Market Corrections: Scott Adams Discovers Market Manipulation  (March 4th, 2013)

So, How Did the Market Timers Do?
Barron’s MARCH 12, 2013

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