Hi Guys,
I’m sure you have been exposed to the financial conventional wisdom that what is critical to achieving investment success is “Time in the market, not market timing”.
Two statistics frequently cited to support that axiom are the hypothetical missing the “X” best performing days (with X typically being 5 or 10 or 20 or even 40 days) with a resultant significant returns penalty, and Dalbar yearly studies that demonstrate investors only manage to capture about one-third of equity returns annually using 20-year survey data sets.
I do not find these arguments particularly compelling. The consistently missing best day argument is a very low likelihood series of events. These studies are statistically meaningless and devoid of practical usefulness. This selective massaging of real data is dishonest with its unrealistic manipulation of that data. It warrants consignment to the dustbin of junk misinformation.
The Dalbar data is extracted using indirect sources to infer investor activity, and is not representative of informed investors like those who frequent sites such as MFO. A disciplined investor can easily outperform the average that Dalbar computes.
But there is another way to examine the best-and-worst-day data sets to establish performance boundaries that measure potential excess returns from an intermediate-term trading policy.
The argument that I find most convincing is one based on overall compound returns over extended timeframes. It compares the cumulative portfolio worth of two extreme timing scenarios.
Over the selected time period, it is postulated that an investor has the prescience or good fortune to invest annually on the day that the market hit a low for the entire year. The second scenario is the exact opposite, the investor has the bad luck to invest on the day that the equity marketplace recorded its annual high water mark for that year. The first scenario maximizes returns for the lucky investor; the second scenario minimizes rewards for the unlucky soul.
When returns are contrasted for this hypothetical and improbable (odds nearly zero) set, the difference in net end wealth and the annual compound return rate provides insights into the maximum, and practically unrealizable, benefits from any market timing scheme. Typically, the S&P 500 Index is used as a market proxy when completing this analysis.
Naturally, results vary depending on the historical study timeframe. However, various studies conclude that compound rates of return for this bounding scenario produce a tight spectrum from about 0.5 % to approximately 2.0 % on an annual basis above a rigid buy-and-hold strategy.
Often a third calculation titled “systematic investing” (usually the first trading day of each year) is also evaluated for comparative purposes. This third scenario describes an investor who is immediately fully invested whenever funds become available. This type of investor, who has no market timing desires or attributes, cuts the disparity in the extreme comparison scenarios by about one-half. Typically, this unsophisticated buy-hold investor sacrifices under 1 % when compared to the mythical perfect timing investor.
The super market timer (in science, a Maxwell’s Demon) obviously enjoys superior end wealth, the magnitude of which is timeframe length dependent. It is equally obvious that this superinvestor does not exist (just like Maxwell’s Demon is a fiction). The likelihood of selecting the single day out of roughly 250 trading days annually over many years is remote with near zero probability odds as the time period expands. It will never happen and thus represents a truly bounding case.
The generic takeaway from these studies is that market timing does not have the capability to enhance a portfolio’s returns by more then 2 % over a very unlucky timing-oriented investor, and by more then 1 % for a buy-hold style investor. In the real world, the super market timer will never achieve these bounding performance enhancements.
These analyses shape a compelling case that defines the limited benefits of market timing. Note that since the analysis framework is designed as an extreme scenario, no specially constructed annual trading methodology can be cobbled together that will defeat it. This bottom-line judgment is independent of whatever timing techniques are discovered and executed. Historical data implies that market timing is a minor contributor to overall market returns based on the type of assessments just outlined.
Are potential timing rewards worth the risk and the required private time commitments? My answer to that question is “No”. What is your assessment? Please post your current thinking in this arena.
Here is a Link to one of the studies that I accessed on the web:
http://www.fpanca.org/assets/documents/Hartford-InvestorSurvivalGuide.pdfIn particular focus on the table displayed on page 7 of the referenced investor survival guide. It clearly demonstrates that “time in the market, not timing” is the dominant strategy. Over decades this strategy has proven itself.
As Damon Runyon wrote in Guys and Dolls: “It may be that the race does not always go to the swift, nor the battle to the strong, but that is the way to bet.” Persistence and patience tilt the odds towards the fully engaged, fully committed investor.
Best Regards.
Comments
Not unlike the surveys one may have taken over the years; with 5 possible answers ranging from "strongly agree to strongly disagree", I will place this house in the "strongly disagree" camp on market timing.
The problem with the implication of "market timing" as a named function, lies in the eyes of the beholder. Does the novice investor get the wrong impression of market timing from the "flim-flam" ads they may read or from a story in one of any of the most popular "investment magazines" they may page through while waiting at the doctor's office? Novice implies that the person has not yet attained a level of knowledge/experience to fully understand the nature of timing.
For my generation, 98% of those who invest are of the novice group. They did or still do participate in a 401k and related retirement plans and their periodic investments are timed for them via deposits withdrawn from their gross pay on a schedule not set by them. The pure event of a calendar date is their timing unit.
You note: "The generic takeaway from these studies is that market timing does not have the capability to enhance a portfolio’s returns by more then 2 % over a very unlucky timing-oriented investor, and by more then 1 % for a buy-hold style investor. In the real world, the super market timer will never achieve these bounding performance enhancements.
These analyses shape a compelling case that defines the limited benefits of market timing. Note that since the analysis framework is designed as an extreme scenario, no specially constructed annual trading methodology can be cobbled together that will defeat it. This bottom-line judgment is independent of whatever timing techniques are discovered and executed. Historical data implies that market timing is a minor contributor to overall market returns based on the type of assessments just outlined.
Are potential timing rewards worth the risk and the required private time commitments? My answer to that question is “No”. What is your assessment?
>>>>>As my time is limited today and this week, I will offer a few pieces of personal data. NOTE: This house has been invested in mutual funds beginning in 1978.
While having our portfolio mix, which was 90% equities; get kicked around from Oct 31, 2007 until our sale of 84% of these holdings in mid-June of 2008, we decided through evaluation of numerous pieces of data that we were no longer comfortable with what we saw in the general investment marketplace, at least relative to equities. We "timed" the market and sold, as noted above.
Our largest equity holding (combined portfolios) at the time was FCNTX. This was and still is, a well managed fund, and has served long time investors well. But, we sold and have never returned to Fido Contra.
The following is some brief data regarding FCNTX:
>>>>>July, 1992 through June, 2008, $10K grew to $70K (per M*)
>>>>>June, 2008 NAV = $68.34, Jan 3, 2012 NAV = $68.42 (yes, there would be some growth via dividends/cap. gains not included with NAV numbers)
>>>>>June, 2008 through Jan. 2012, -.5% (per Google Finance)
Now. If my recall is correct; you have about 20 more years in the investment world, versus this house. I will presume you are not a pure buy and hold investor, and that you have altered your investments over the years. Some of these changes may have been from a pure point of an investment going nowhere but down. Past this, I will also presume you have adjusted your portfolio based upon other personal criteria. In my opinion, when one adjusts their portfolio; there is an essence of market timing in place. I suspect for many, that the event is just not considered in this aspect. The timing may have come from one's personal adjustment as to what they feel in a "new" risk/reward or comfort zone. This is not "market timing" in the technical sense; and so, does not flow completely to your notations, but in my opinion is a personal, behavioral market timing.
Past this aspect, there are indeed cycles that one may attempt to study and learn from; and I do feel there are valid technical methods to help determine when it may be time to move along, either with or without a profit. I will note that I do feel machine trading and the algo models that run these trading machines have had a negative impact upon the confidence "the regular, individual" investor; and may also compound and confuse one's ability to time some markets.
Relating this to a football game. We have scored very few touchdowns over the many years. Investment touchdowns for this house are either decent profits or avoiding large losses.....Tis no fun compounding the returns when they are at a negative, eh?
We were out of equities during the fall of '87 melt; although that was a non-event several months later, unless one sold at the short lived bottom. We moved through a few "slim" years....if I recall, 1990 and 1994. We continued to invest through and past the "tech bubble" of 2000. And we were down only -8% for the most recent melt of 2008-09.
Yes, this house is a market watcher and timer if need be. We do not trade many funds in a year's time; but are not shy about moving on past a loser or attempting to find where the monies should be based upon our viewpoints.
As noted about football. We are content with moving between the 30 yard markers and going for the field goals to nickel and dime the points total. We can win the game this way, too. Touchdowns are nice, and sometimes involve skill as well as luck. The fumbles (stopping losses) can be the killers. We prefer compounding the positive numbers. In this respect, our house has generally been in the area of what Fundmentals wrote about while at FA; Make More,Lose Less. And yes, if one does not have the time or passion to practice timing of anything; the "do not attempt this at home" rule applies.
per Investopedia Definition of 'Market Timing'
1. The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data.
2. The practice of switching among mutual fund asset classes in an attempt to profit from the changes in their market outlook.
Investopedia explains 'Market Timing'
Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Thus, whether market timing is possible is really a matter of opinion.
What we can say with certainty is that it's very difficult to be successful at market timing continuously over the long-run. For the average investor who doesn't have the time (or desire) to watch the market on a daily basis, there are good reasons to avoid market timing and focus on investing for the long-run.
Hoping some of this makes sense..........short of coffee this morning.
Regards,
Catch
Hi Catch,
Thank you for your expansive and comprehensive reply to my question. It was very thoughtful and thought provoking.
I particularly enjoyed your sports analogies. Like all analogies they fail in detail, but they often capture the main elements of your assessments. Additionally they’re both fun to write and read.
Currently, I’m in the distribution phase of my portfolio’s lifecycle as opposed to the accumulative phase. So my present strategy is somewhat modified from what I deployed during my earlier investment years. I now more passively seek market returns, whereas in the past I attempted to secure a modest Alpha (excess returns) component.
So, while accumulating wealth was my primary goal (always with downside risk mitigation tactics), I was never satisfied with kicking field goals. I didn’t always manage to score, but I never tired of the game nor did I ever lose my faith in the marketplace. That patience and persistence served me well.
I am not now, nor have I ever been a buy-hold investor, but I am not a frequent trader either. Over decades, I typically held 20-25 positions in my portfolio. I do so today. On average, I trade about twice a year. My portfolio turnover rate is usually between 5 and 10 percent.
I always changed my portfolio by one holding each year as a minimum. My basic reason for that trade was an upgrading attempt. It was an attempt to improve the overall quality of my holdings considering the portfolio as a whole unit. I never considered each trade as being technically based; it was more likely grounded on fundamentally-based economic and/or fund management assessments.
While I do not primarily use technical analyses in making investment decisions (never MACD, for example), I do use Moving Average market charts to reinforce my decisions in a sort of tertiary way. In the short term, markets are often inefficient; in the longer term, markets are efficient and reflect GDP growth rates and prices that correlate with corporate profits.
Catch, you are a committed student of the marketplace. I applaud your dedication to wealth preservation. I hope some of my postings have been useful for your financial purposes.
By the way, I have owned FCNTX as a meaningful fraction of my portfolio for over two decades. If nothing else, I am persistent.
Best Wishes and Best of Luck,
MJG