Trying to time the market is a tough proposition. Based on performance statistics, it’s something that should be left to the pros. Even the pros (I’m referring to hedge fund managers, model developers and investment advisors), get it wrong and most produce lackluster results – compared to long-term passive (i.e. buy-and-hold) investors.
I don’t recommend market timing for the average investor, however, because most likely, the non-professional doesn’t have a competitive market timing model to begin with. Most amateurs trade from the gut – reacting to news and market gyrations. As we’ve seen in 2018, especially, going in the direction of a big move can be a losing strategy. One day there’s a huge reaction (a 300 – 500 point move in the Dow Jones Industrial average, for example), and three days later the market has reversed course.
Or, amateurs are pressured into getting on board near market peaks (“Heck, Aunt Mary made in Google, I gotta get in on it,”) and then throw in the towel near market troughs (“I’m getting killed, I don’t ever want to see another stock again!”). These types of mindset are common for wanna-be traders.
Yet the pros – those who are successful – have access to competitive market timing models. These market timing models are not perfect by any means – but they work. The biggest advantage that pros with competitive market timing models have is that they preserve capital in bear markets. The elite even make money on the way down. The result is that even if a average yet solid market timing model ends up with the same returns as the stock market, it makes you stay on the sidelines when the market is collapsing. This is huge not only because of the amount of anxiety and stress that you bypass during bear markets, but the risk or volatility (usually measured in terms of standard deviation), of performance returns are greatly reduced. Since the winners of the trading game are those who can generate the highest reward (average annual total returns) per ounce of risk assumed, those who have competitive market timing models have a huge advantage over passive, buy-and-hold investors.
However, it is very hard to find a viable market timing model that will tell you when to get in and out of the stock market. You may be able to hire a professional fund manager to do this, or subscribe to a market timing service online that generates entry and exit signals – but between management fees, subscription fees reliability, as well as the incredible challenge of being able to follow a models’ signals faithfully – we may be opening up a huge can of worms here. It is extremely hard to follow a market timing service’s signals – because half the time you second-guess the signals’ validity – the result is that you don’t really follow the system but some variation of your own judgement instead. Many fall into this category.
I have extensive running market timing models but I’m careful to segregate them from WealthMaxBuilder passive portfolios by keeping them in separate trading accounts. If you don’t have the experience, skills or interest to time the stock market then you’ll definitely want to skip this section and simply run a competitive passive, balanced asset allocation like the WealthMaxBuilder portfolio instead. (WealthMaxBuilder is not the only competitive passive strategy out there – there are many out there. I’m just mentioning WMB because I designed it).
As mentioned, the main reason market timing makes sense for traders and investors is that it helps you cut losses and thus preserves capital. Any time you experience a drawdown of 10% or more, basic math tells us that it becomes increasingly harder to recoup losses the greater the drawdown. Here’s a chart that shows why:
At some point, taking a loss for a volatile investment makes a lot of sense. Please note that recouping a 50% loss requires a 100% rebound to get back to square one (not 50% !!!) But significant rebounds don’t happen immediately. It may take 10 – 15 years to achieve a 100% recoup from a 50% drawdown. Japanese investors had to wait 15 years to recoup losses of over 90% during the 1990s. Dow Jones Industrial investors had to wait 26 years to recoup losses of over 85% from the Great Depression.
If you could move even some of your capital away from stocks into bonds (or even to cash) during these massive drawdown periods, you would not have to spend years of time sitting on zombie capital. This is money that could have been put to work earning interest.
Of course, hindsight is 20/20, and not everyone can call a bear market like Sir John Templeton. How many market timing models exist that can preserve capital during bear markets, yet keep you in the game during bull markets? And just as important, how many investors (or even fund managers) have the discipline to follow each and every timing signal without second-guessing it at any point in time (especially when the timing model goes through a choppy funk period)?
It’s harder than you think to follow even a rock solid market timing model, because of the second-guessing that’s involved! Even the best trading models have their funk periods. But a pro market timer will still have the guts to pull the trigger and take the next signal even after 5 or 6 losing trades in a row! even in the face of adverse fundamental news or when the everybody’s saying to go the other way! This is why I sincerely doubt whether the non-professional has what it takes to run even the best market timing model.
Market timing is indeed a challenge – and so I cannot stress enough the importance of having a well-balanced passive asset allocation like the WealthMaxBuilder portfolio for non-professionals. Bottom line is that if you’re not a pro, you probably should not get into market timing.
This isn’t to say that pro market timers are superior. The market timing survivors get paid to make tough decisions – day in and day out. The individual investor has the power of compound growth and the ability to set up a balanced asset allocation on his side. The long-term results from following a balanced passive investment strategy rival that of the professional market timer. To view these results, please check out the Essentials of Investing eBook.
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