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Market Timing Is For The Birds

  • Written by Syndicated Publisher No Comments Comments
    October 7, 2014

    John Waggoner, USA Today, recently wrote an article entitled “Investing, Market Timing Is For The Birds” wherein he discusses the issues of market timing that has always plagued investor’s returns. However, while John does touch on long term versus short term investing, he did not go far enough in his explanation.

    John’s article correctly admonishes “market timing” which is where an investor, using some market timing strategy, tries to be “all in” or “all out” of the market. As John notes:

    “Other dangers of market timing include getting whipsawed. For example, a basic timing method is to measure the Standard and Poor’s 500-stock index weekly against its 39-week average. If the S&P 500 is below its 39-week average, you sell. Moreover, had you followed this technique, you would have gotten a sell signal in July 2007.

    Unfortunately, you would have gotten a buy signal in August 2007, a sell signal in early September 2007, and then a buy signal in mid-September that lasted until November 2007 — by which point you probably would have thrown up your hands and gone searching for a rare Throckmorton’s warbler.If it is impossible to predict the market accurately, at least with any precision, what should you do?”

    As with the majority of the articles written on this meme the end conclusion is always that one should just invest in the markets, and continue to buy on a regular basis regardless of market conditions. However, while the comparison between “buy and hold” investing and “market timing” is accurate, it is also incomplete.

    John is correct that “market timing” is a fool’s errand. Picking the exact peak or trough of the market is extremely difficult and doing so can be more attributed to luck than skill. However, to effectively win the long-term investment game, any investment discipline requires that the process be repeatable. Since market timing is effectively trying to guess the next move of the market, it is likely that more often or not an individual will wind up on the losing end of the bet.

    However, John is both correct and incorrect about the success of “buy and hold” investing as an investment strategy. He is correct that dollar-cost averaging into a portfolio of investments over a very long time frame will inure to the benefit of individuals. Where he is incorrect is in the individual’s ability to accomplish such a goal due to the impact of psychology during the completion of a full-market cycle.


    Dalbar Research produces an annual report on how investor’s behavior compounds their investment problems by continually “buying high and selling low.”

    I have often shown the investor “psychology” cycle of investing which is how people, despite advice to the contrary, continually respond to market stimuli.


    As markets rise, more and more articles like John’s flow through the media suggesting that investors should buy into the financial markets and just hang on. This is seen near every major market peak as optimism builds that the current cycle will continue infinitely into the future. Consequently, when markets inevitably fall, the evaporation of individual’s “life savings” leads to a panic driven liquidation.

    I recently conducted an investor survey which highlighted this exact phenomenon. To wit:

    “Despite the media’s commentary that ‘if an investor had ‘bought’ the bottom of the market…’ the reality is that few, if any, did.  The biggest drag on investor performance over time is allowing ’emotions’ to dictate investment decisions.  This is shown in the 2013 Dalbar Investor Study, which showed ‘psychological factors’ accounted for between 45-55% of underperformance.  From the study:

    ‘Analysis of investor fund flows compared to market performance further supports the argument that investors are unsuccessful at timing the market. Market upswings rarely coincide with mutual fund inflows while market downturns do not coincide with mutual fund outflows.’

    In other words, investors consistently bought the ‘tops’ and sold the ‘bottoms.’

    The media never discusses the impact of psychology on investing which is real and extremely destructive to long-term returns. What is interesting is that these investment mistakes are always made during the first half of the full-market cycle as “greed” overtakes a logical and disciplined investment process. Those mistakes, however, are only recognized during the second half of the cycle as the general “panic to sell” overwhelms “buy and hold” logic.

    The chart below shows the full market cycles over time. Because the current “full market” cycle is yet to be completed, I have drawn a long-term trend line with the most logical completion point of the current cycle.


    Portfolio Management

    Individuals should consider adopting a combination of “buy and hold” investing and “market timing.” This is something I have come to term as “portfolio management.”

    The two-charts below show the markets from 1980 through 2000, and 2000 to present. I have overlaid two weekly moving averages with the short-term moving average half the length of the long term. (This is only for illustrative purposes) The use of weekly data reduces the volatility of the daily price swings which reveals the underlying trend of the market.



    Since we know that investors “buy high” and “sell low”, the purpose of this type of analysis is to insert a discipline that mandates a “sell high – buy low” methodology.

    IMPORTANTLY: Portfolio management, as often misconstrued by the media, is not an “all in / all out” methodology but rather a “weed and prune” process. A “moving average crossover” methodology, while simplistic in its nature, would dictate profit taking and portfolio rebalancing near market peaks and rebalancing and investing near market bottoms.

    In the bull market of the 80’s and 90’s, this methodology kept investors “in” the market the majority of the time. During the entire 20-year period, there were only eight (8) primary portfolio actions required. Since the turn of the century, this methodology would have protected investors from the major drawdowns in 2000 and 2008 while keeping them invested the rest of the time.

    Sucessful investing requires the adoption of an investment discipline that facilitates a “buy low/sell high” process. This is why the basic tenants of all the great investors of our time like Benjamin Graham, Paul Tudor Jones and Ray Dalio, repeatedly discuss risk management and a sell discipline.

    Lastly, while one can argue that a “buy and hold” strategy since 1900 would have been successful, the reality is that no one lived that long. While we can manufacture more “money,” the one commodity we cannot create is more “time.”  

    No one has 100 years to invest to achieve the long-term investment returns touted on Wall Street. What all investors do face is the reality of the incredible time crunch between the beginning and end of the “accumulation phase.” The problem is that the “accumulation phase” is much shorter than the “distribution” phase particularly as life expectancy creeps ever closer to 100 years of age. Therefore, investing mistakes made early on have a tremendous impact on the result due to the lack of “time.”

    Investing is important, however, structuring a discipline that manages “investment psychology” is far more critical. While the bull market cycle that began in 2009 has been of great benefit to those with capital to invest, the second half of the cycle is yet to come. What will separate successful investors from everyone else is the navigation of the next downturn to preserve the gains made during the first half of the game.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.


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