Market Timing: Possible to Win, But It’s A Loser’s Game

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Market Timing: Possible to Win, But It’s A Loser’s Game

Larry Swedroe Sep 29, 2015



No Way to Know


The following example demonstrates the difficulty of timing the market, in part because so much of the market’s returns occur over such short and totally unpredictable periods. There are a total 1,020 months in the 85-year period from 1926 through 2010. The best 85 months (an average of just one month each year, or just 8.3 percent of the months) provided an average return of 10.7 percent. The remaining 935 months (91.7 percent of them) produced virtually no return (just 0.05 percent).

Famed investment manager Peter Lynch offered another example. He pointed out that an investor who followed a passive investment strategy and remained fully invested in the S&P 500 over the 40-year period beginning in 1954 would have achieved an 11.4 percent rate of return. If that investor missed out on just the best 10 months (or 2 percent of them), his return dropped 27 percent, to 8.3 percent. If the investor missed the best 20 months (or 4 percent of them), his return dropped 54 percent, to 6.1 percent. And finally, if the investor missed the best 40 months (or 8 percent of them), his return dropped 76 percent, all the way to 2.7 percent.

Do you really believe that there is anyone who can, before the fact, select the best 40 months in a 40-year period? Lynch put it this way: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”


No Crystal Balls


John Bogle, Vanguard’s legendary founder, said this about market timing: “After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”

But perhaps renowned investor Bernard Baruch said it best: “Only liars manage to always be out during bad times and in during good times.”


Tactical Asset Allocation (TAA)


The objective of TAA is to provide better-than-benchmark returns with (possibly) lower volatility. This theoretically is accomplished by forecasting returns of two or more asset classes and varying the exposure (the percent allocation) accordingly. The varying exposure to different asset classes on which TAA depends is based on economic and/or market (technical) indicators. A TAA fund would then be measured against its benchmark.

While a TAA fund’s benchmark might be represented by a 60 percent allocation to the S&P 500 and a 40 percent allocation to the Barclays Aggregate Bond Index, the manager might well be allowed to have his or her allocation levels range from 5 percent to 50 percent for equities, 20 percent to 50 percent for bonds, and nothing to 45 percent for cash. In reality, TAA is just a fancy name for market timing. In other words, it’s a way to charge higher fees.

So, how has Morningstar’s Tactical Asset Allocation category performed relative to a 60/40 S&P 500 Index and Barclays Aggregate Bond Index portfolio? Morningstar reports that over the three years ending July 2014, these funds have gained an annual average of 7.8 percent, or 3.8 percent per year behind their benchmarks. And these findings are nothing new.


The Bottom Line


Investors are well served to heed this warning from behavioral economist Richard Thaler in his book, “The Winner’s Curse”: If you are prepared to do something stupid repeatedly, there are many professionals happy to take your money.

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