Ritholtz: The Truth About Market Timing
Good thoughts here by Barry Ritholtz on market timing and the role of risk management in portfolio analysis:
“The data overwhelmingly shows that no one is ever going to make a risk assessment that allows them to top tick on the way out going to 100% cash at the highs and bottom tick at the bottom, going all in. Forget the proverbial typing monkeys writing Hamlet; even a million fund managers over a million cycles might not generate one outcome of top and bottom ticking. And if it did, we know it would be purely random. Perhaps a fairer test to the Timers would be getting out within 10-25% of a peak and getting back in within the same parameters at the bottom. (Hulbert plays with the parameters for timing in the column, but none of the Timers does especially well).
Regardless, that one in a million-million trades misses the point. Individual investors should not market time, but they should be aware of other factors when they make capital commitments.
I prefer to employ Risk Analysis rather than engage in pure Market Timing.”
Read the full post here.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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14 Comments
what u can say is that 70% of the articles on this site are just time fillers . Cullen we need new insights !
Hater’s gonna hate – this is a blog my man, and it’s offered to you for free.
The reader posts are usually more thought-provoking or insightful than the articles.
Too many chartists trying to divine future stock market movements from the variations in the median temperature in Duluth, Minn., or Perth, Australia.
Are we all technicians and momentum traders now?
Is fundamental analysis a thing of the past?
If your into portfolio rebalancing (slow money) you would be a net seller of equities……
Ritholtz’s last couple of sentences:
“Most people are much better off if they simply do two things: Rebalancing their holdings on a regular basis and changing the tilt of their allocations on rare occasions (i.e., 70/30 to 60/40).
Focus on maintaining an intelligent balance of assets, and leave the martket timing to the newsletter writers. When they get it wrong, they lose subscribers. When you get it wrong, it crushes your retirement plans…”
Again, this is right out of the Marketing material that Vanguard has been publishing for years, if not decades now.
So go out and enjoy life then instead of reading any financial blogs?
How do you know that reading financial blogs and “enjoying life” aren’t one in the same?
No, I was just struck by the similarity in this article and one Cullen posted a day or two ago (the “REAL REAL Returns” article) to the Marketing stuff I’ve been getting from Vanguard since the early 1990s. I think it’s good advice actually. I suppose all the big fund companies have similar material…. so I guess it shouldn’t be a shocker.
Because it is a fact that the majority of market timers have poor track records, my conclusion is that 75% of my portfolio should be allocated on a long-term “strategic” basis (based on age, risk tolerance, etc) and only 25% or less should be allocated to tactical assets which are used to time the market or rotate sectors and the like. I also think that “extreme” allocations like 90% in stocks or 90% + in cash or stable value funds won’t work for you over the long term. Sooner or later you just have to make a hard decision and decide what your long-term strategic allocation should be to equities, bonds, and cash. Only re-balance after that.
Ritzholt is a pig that wears a suit and speaks.
Whoa. Let’s not do that here. No one gets anything out of childish name calling. Thanks.
you must one of the bloggers that he’s recently screened out of posting on the big picture . . . and from this post, it’s kind of apparent as to why. as barry has been posting recently GYOFB . . .
I think market timing misses the larger picture.
You either are on the side of Capitalism – or – not.
The brokers and most news letter writers and financial planners, mutual fund and hedge fund managers (sponsors on these websites) want you to try to time the market or better yet – let them do it for you for a fat fee.
Excitement and Expenses are an investors two worst enemies according to Warren Buffet. He never recommends market timing, but for those who INSIST on trying to time the market he says “Buy when others are fearful and sell when others are greedy.”
“Buy when others are fearful and sell when others are greedy.” It sure seems like folks are greedy now, and with VIX so low, no fear is exhibited, or very little fear. Looks like a good time to take some profits, lighten up, or at least re-balance.
I’m an investor not a trader, that being typed, a bit of market timing makes a huge difference. IRS tax withholding data shows that many many folks get bonus pay in the first quarter and I think this makes new money available for investing. First quarter 401k contribution are not even counted in that data. So in Apr-May I trade my retirement 2040 fund for the 2015. In Oct-Nov trade them back. If I do this only every other year, I’ll need to pay long-term cap gains tax instead of short-term. I try to do this every year with two sets of 2040-2015 funds, even though I’m already retired.