What is Market Timing?

19 responses so far ↓

• 1 Four Pillars // Nov 27, 2008 at 9:49 am

  Yah, I think it is almost impossible to be 100% not-a-market-timer. Even rebalancing is a form of market timing.

  I’ve been thinking of moving some or all of my bond position (20%) to equities. Market timing? Yup.

• 2 DG // Nov 27, 2008 at 10:35 am

  The book “Intelligent Portfolio” talks about rebalancing as timing. The relevant part from the book is posted here about 2/3 of the way down (search for “unintentional bets”):

  http://www.bogleheads.org/forum/viewtopic.php?t=19868&highlight=#top

  The author is a proponent of “macroconsistent” allocation, ie, align yourself with total market allocation. The approach is self-balancing, no need to move stuff around.

• 3 Burce // Nov 27, 2008 at 11:35 am

  I have moved all my bonds to stocks

• 4 Dividend Growth Investor // Nov 27, 2008 at 12:51 pm

  Hmm to me market timing involves active trading and does not involve buy and hold investors who simply add to their mutual funds every two weeks.

  I don’t rebalance my portfolio by selling, but by allocating any dividends to stocks which are underweighted due to price performance or lower initial investment. I also dollar cost average every month into several dividend stocks to bring weights up to equal..

• 5 Canadian Capitalist // Nov 27, 2008 at 1:05 pm

  Mike: According to Swensen’s definition, rebalancing isn’t market timing. In fact, not rebalancing is. I think this is a logical definition.

  DG: I’m not sure I agree with Jones because as Michael James pointed out in a comment, it makes no sense that a market portfolio is suitable for anyone in the first place. Individual investors construct portfolios depending on their situation — for instance, if both spouses can get a DB pension at work, they may logically choose to have most of their portfolio in stocks.

  Burce: That is a bold move but for now, I’m sticking to my asset allocation.

• 6 ETF2X // Nov 27, 2008 at 4:31 pm

  There are various degrees of market timing and the definition you provided is merely one person’s definition. I have my own timers and the average time between signals is around five months. There are commercial timers available that generate signals as rapidly as a three times every two weeks for example.

  By moving in and out of stocks every five months, am I an active trader? I’m not a buy-and-hold investor but I’m not what I consider an active trader.

  Time will tell how well my methodology performs but the results so far are impressive in my opinion. Of course, just because my timers have worked in the past is no guarantee they will work in the future.

  There is no one investing methodology that works for everyone and that’s a good thing really. Whether or not you engage in market timing and the degree to which you do is an individual choice. For me, my timers are my investing edge. As has been said by others, in investing you must have an edge if you expect to beat the market. If you don’t know what your edge is then you don’t have one. For some of the posters on this site, their edge is cost minimization.

  There is no such thing as perfect market timing. However, there may be timers available that will provide investors with better-than-market returns over time. If you combine a good market timer with double exposure ETF’s as I do, you should easily beat a buy-and-hold strategy.

  Following a market timer is a little more difficult than most investors may think. For example, I was an active investor and always had the desire to “do something”. With the methodology that I have developed and now follow, I usually do nothing. Doing nothing is counter-intuitive for some investors. Also, when the market is rising and you are not invested in stocks or market-based ETF’s you can’t help but wonder if you missed the bottom and should jump into the market even though your timer is telling you to stay on the sidelines.

  FJP

• 7 NN // Nov 27, 2008 at 6:23 pm

  I will not dare to muse on the proper definition of market timing. I think anything other than mechanical dollar averaging or rebalancing may be viewed as ‘timing’ of some sorts.

  ETF2X - I am very suspect of any method that would lead to aggressive moves such as a 100% turnaround in asset allocation, not to mention using instruments that leverage that position as well. I know that you mentioned previously that your method is not ‘technical analysis’, but is sure seems very similar. The market has a way of quickly discovering any ‘rule’ that will allow consistent outperformance, and as soon as enough people practice it, the advantage disappear.

  The folowing is not meant as an implication of any kind, but I have always wondered why people would want to advertise a ‘market beating’ strategy? Surely, if I was in posession of such a strategy, I could amass significant wealth even from meger initial capital. And given that the advantage will be depleted if more people share in the strategy, I would just keep it to myself?

• 8 ETF2X // Nov 27, 2008 at 7:06 pm

  NN:

  There is nothing to preclude me from not sharing my timer signals if I so choose in the future.

  I don’t mind your skepticism at all. Since I have been following my models for less than a year with my own investments, all I can suggest is that in two or three years time we revisit the issue and compare my investment performance to a buy-and-hold strategy. Even then, there will be critics who will note that two or three years outperformance doesn’t statistically prove anything. That would be a just criticism. However, by the time my investment outperformance could be statistically proven to exist should it happen, I won’t care given my age at the time!

  FJP

• 9 ETF2X // Nov 27, 2008 at 7:14 pm

  NN:

  One other point. How many people are you aware of who advocate a given methodology of investing and post their actual returns on an objective site such as Covestor? Think of all the financial writers, authors, advisors, etc. who come to mind and ask yourself if you are aware of their actual investment performance.

  My investment results are on Covestor and I am currently ranked in the Top 50 for the past three months. I only began following my timers/models in late June and have achieved a high ranking by getting out of stocks this summer.

  Yes I know that a three month performance ranking means little. That’s not my point so much as I am brave/foolish enough to post my trades on Covestor. I could be wrong but I am not aware of any other regular posters on this site besides CC who post their trades real time (or close to it) for all to see.

  FJP

• 10 Phil S // Nov 27, 2008 at 10:52 pm

  There is market timing then there is gambling. Investing in stocks THESE days is more like gambling. Many companies are still posting bad news and that is what has dragged down the indices. While it is true that you may be able to find a stock that goes against the overall market and may end up being a 10-bagger for you. But you can also go to a roulette wheel in some casino and get the same result. In terms of “investing”, it would be better to wait out the economic news and look for a sign of the bottom, which is not necessarily good news, but perhaps an absence of bad news.

• 11 Doug // Nov 27, 2008 at 11:30 pm

  When I initially started to invest, I tried to time the market. I was the Canadian champion when it came to performance chasing. After predictable results, I stopped doing that. Recently, I have been doing what Burce describes. I have shifted much of my portfolio out of bonds into stocks. Time will tell whether I have repeated my mistake. However, stocks were suddenly cheaper than they had been in years; it was a temptation that I couldn’t resist.

• 12 Canadian Capitalist // Nov 28, 2008 at 2:22 am

  Fred: I don’t publish my actual buying and selling but my asset allocation and performance closely tracks the Sleepy Portfolio because I simply try to maintain a target asset allocation. Simple enough that anyone can do it on their own.

• 13 EconStudent // Nov 28, 2008 at 10:56 am

  Diversification through indexes is removing unsystematic risk. (academic terminology)

  The idea of market timing is to control systematic risk. Rebalancing is one of the systematic way of decreasing some systematic risk. According to one of the examples by Professor Malkiel, rebalancing reduced volatility by 10% and enhanced returns by 1% annually over a ten year period.

  Now I think about it, rebalancing does not reduce systematic risk enough, but the logic behind rebalancing is very strong. Systematic risk increases when equity prices increase and systematic risk decreases when equity prices decrease. Therefore, it makes logical sense to decrease equity exposure when equities are going up to maintain the same amount of systematic risk, while increase equity exposure when equities are going down to maintain the same amount of systematic risk. Initial asset allocation determines the initial exposure to systematic risk.

  NN: Thank you for telling me about Robert Schiller’s research on P/E ratio.

• 14 Dale Rathgeber // Nov 28, 2008 at 4:28 pm

  Great topic and comments by all.

  I was the person whose momentum and autmn abstinence strategy at http://www.Octoberstrategy.com, challenged those critics who dismissed my strategy as “market timing”.

  Sweinson’s definition may be technichally correct, but it does not seem to be widely known. The term tends to be hurled at anyone who does anything other than buy something, and then hold it indefinitely, according to the “buy and hold” mantra of the mutual fund industry. So perhaps a I am a “market-timer”, albeit either a very good one, or a merely very lucky one, on an eight year lucky run, as some of your indexing commentators have alleged.

• 15 ETF2X // Nov 28, 2008 at 4:50 pm

  Dale:

  From the information on your site, it appears that your timing dates are similar to that suggested by Brooke Thackray. From Brooke’s research on the DOW, you can beat a buy-and-hold strategy simply by buying on October 28 and selling on May 05.

  Brooke’s web site is http://www.alphamountain.com

  FJP

• 16 Dale Rathgeber // Nov 28, 2008 at 8:35 pm

  ETF2X: In Thackray’s first edition of “Time In;Time Out” he advocated July 20 as a slightly better exit day than May 5. We can’t exit on July 20 and stay within the 90 day minimum holding rules to avoid Short-term fees. Therefore, we stay invested until Sept 4 or 5 to take advantage of the “first few (and last few) days of the month” phenomenon, during which equities typically rise.

• 17 Relaxed Sunday Financial Links | Credit Card Information // Nov 30, 2008 at 8:40 pm

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• 18 Drew // Dec 7, 2008 at 8:58 am

  When discussing market timing one has to carefully define time horizons. With market swings in double digits over the course of a week or even a day it is tempting to make short-term buys. However, most would agree that is very difficult to do and foolish to attempt. But I my opinion selling your bonds in favor of purchasing equity or simply putting a higher portion of your disposable income in a bear market is a very different strategy. Nevertheless, it is still market timing.

• 19 Relaxed Sunday Financial Links | Personal Finance Blog by Money Ning // Dec 26, 2008 at 1:27 am

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