Why is 'Timing' the market bad ?

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  • kidmugsy
    kidmugsy Posts: 12,709
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    jamei305 wrote: »
    If these people had conviction behind their crash predictions, instead of chucking them out like hot air, then surely they would have shorted the market to the maximum extent possible and be billionaires by now.

    What makes you think that Shiller isn't a very wealthy man?
    Free the dunston one next time too.
  • jamesd
    jamesd Posts: 26,103
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    edited 18 March 2017 at 3:23PM
    kidmugsy wrote: »
    What is less clear to me is whether people have been equally good at recommending when to start buying again. That may be because it makes duller headlines. "Sell says Snooks, world about to end" probably sells more papers than "You can return to the equity market now if you like, says Snooks". Perhaps for that reason I haven't noticed it.

    But even if you can demonstrate that they aren't as good at that there's an easy remedy. Just adopt some simple unthinking rule such as "buy again starting three years after selling". After all many people are happy with the unthinking rule "always buy and hold" so they can have no objection of principle to using an unthinking rule. Or maybe you could invent an unthinking rule involving the valuation metrics; that might be more logical.
    What I did in my first serious market timing exercise was set up pension salary sacrifice down to minimum wage after the market drops in early 2008, knowing that there was a substantial chance of further drops that further cut my buying price. Then in early 2009 I added non-pension leveraged investing and lots of money from cash. Today I'd also look at Shiller's PE10 being at least below the long term average.

    Overall I'm fairly happy with my market timing efforts. Too soon to know how the current one does. That may well take a few years.
  • jamesd
    jamesd Posts: 26,103
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    AlanP wrote: »
    The difficulty at the present time is what are the alternatives?
    Directly held P2P loans is what I'm using and normally suggesting instead of bonds at the moment, and of course what I've been doing myself as well as writing about it here for quite a while now. Returns likely to be above the long term equity average at the moment but without the equity exposure. The security is often buildings so that's something to be aware of and manage exposure to.
  • jamesd
    jamesd Posts: 26,103
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    edited 19 March 2017 at 2:44AM
    Linton wrote: »
    Do you do this? A quick Google comes up with lots of references showing that long term holding of leveraged funds is a seriously bad idea and wont do what one may think it would.

    http://www.etf.com/etf-education-center/21044-leveraged-and-inverse-etfs-why-2x-is-not-the-2x-you-think.html

    http://finance.yahoo.com/news/7-mistakes-avoid-trading-leveraged-130053722.html

    Are they wrong? If so why?
    Not at the moment but yes, I have used that one and may well do so again a little while. I almost certainly will use it after a big drop. Those are the sort of thing that I meant with my "(there are tracking error issues to learn about to do it properly)" note.

    To see something less theoretical, just pay a visit to the LUK2 chart and set the time period to five years, then add as a comparison the FTSE (note that LUK2 is total return, not the pure FTSE).

    Observe that the FTSE 100 (without dividends!) is up 5961.11 to 7415.95 - 24.40% - and LUK2 16893.50 to 29209.00 - 72.90%, including dividends. The gain should only have been 48.8% before dividends. But of course comparing with and without dividends is unfair.

    But that's not the FTSE 100 so how did it do compared to that? Look at BlackRock 100 UK Equity Tracker Class D - Accumulation (GBP) and add an equity, LUK2 to add the leveraged tracker ETF. Both accumulation and now you can see a very clear tracking error, with the leveraged fund under-performing twice the index tracker fund. Data for the tracker only goes back to June 2012 but here are the last four annual moves which show the tracking errors:

    17/03/13 -17/03/14 4.62% 5.57%
    17/03/14 -17/03/15 7.38% 10.65%
    17/03/15 -17/03/16 -5.98% -17.23%
    17/03/16 -17/03/17 25.52% 48.31%
    Last three years cumulative: 26.73% 35.83%

    Of course there are two more sources of tracking error in what I described:

    1. The P2P is paying interest that will add around 3.5% upwards tracking error to the whole per year. About 10% before compounding but only on a third of the combination.
    2. Being in effect one third in fixed capital value, the P2P third will reduce the drops by that much, but without reducing the gains because the two to one leverage keeps that.

    And of course I swapped out FTSE All Share Index for just the FTSE 100 so some FTSE 250 would really be needed to better track the all share.

    As one of the places you linked to mentioned, it's really better to get the leverage by borrowing or other tools instead of a daily tracker ETF, if you want good long term tracking with low tracking errors.

    If you want something far easier to model, swap out the fixed interest for P2P instead, without leverage.
  • coastline
    coastline Posts: 1,647
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    jamesd wrote: »
    What I did I my first serious market timing exercise was set up pension salary sacrifice down to minimum wage after the market drops in early 2008, knowing that there was a substantial chance of further drops that further cut my buying price. Then in early 2009 I added non-pension leveraged investing and lots of money from cash. Today I'd also look at Shiller's PE10 being at least below the long term average.

    Overall I'm fairly happy with my market timing efforts. Too soon to know how the current one does. That may well take a few years.

    Article here highlighting the P/E valuations..

    http://www.valuewalk.com/2017/03/10-13-times-ended-badly-david-rosenberg/?all=1

    Or maybe valuations aren't the problem ?

    https://www.youtube.com/watch?v=Sfg8J2jdyDU

    Earnings estimates..

    https://www.yardeni.com/Pub/peacockfeval.pdf

    A video from January suggesting a major breakout ?

    https://www.youtube.com/watch?v=_E503hMQP1M&feature=youtu.be&t=9m20s
  • jamesd
    jamesd Posts: 26,103
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    jamei305 wrote: »
    If these people had conviction behind their crash predictions, instead of chucking them out like hot air, then surely they would have shorted the market to the maximum extent possible and be billionaires by now.
    Shiller would be far too sensible to do that. The aphorism "The market can stay irrational longer than you can stay solvent" exists for a reason, on the back of the bankruptcies of those who tried such things. Being right long term doesn't help if you run out of money in the short term, as both poker players and occasionally casinos have also learned.

    Long positions without leverage can only cost you all of your money, if it was possible for a market to drop to zero (full nationalisation, say). Short can cost you more than you started with and leveraged shorts make that even worse.

    That's also why sensible leverage ratios tend not be be higher than about three to one overall. You need to be able to survive a drop while still having enough invested to recover and make money, going below zero prevents that.
  • kidmugsy
    kidmugsy Posts: 12,709
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    From Forbes

    Shiller says his thesis supervisor ... taught him not to trust market efficiency because it was only a half-truth. He says Modigliani's papers on how inflation distorts markets prompted him to invest all his money in the stock market in the early 1980s as Paul Volcker's rate hikes kiboshed inflation and sent the stock market soaring.
    Free the dunston one next time too.
  • BrockStoker
    BrockStoker Posts: 917
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    edited 21 March 2017 at 4:44PM
    I first took over managing my portfolio around 4 years ago, and have been experimenting with timing for almost two years now.

    Given my experience so far, I'm inclined to say that timing is not necessarily a bad thing and I will continue to try and time the markets whenever I see a potential opportunity.

    I don't think that "timing the market" and "time in the market" are necessarily mutually exclusive. In my case I probably hold a bit more cash than most (especially now since I'm in the process of tweaking), but most of my money is invested (83.6% right now), and I'm also ready to take advantage as soon as an opportunity presents itself.

    If you take profits from a fund after it's done well, and then use those profits to invest in a fund that has not done so well (which is basically what I'm doing), then I don't think it's wrong to call it "re-balancing" rather than "timing".

    Buying low and selling high is a good thing, right? If you don't time your buys/sells then how can you reasonably expect to buy low/sell high? So you could argue that most people on here (if not all) time the market to some degree or other.

    The other main point I'd like to try to make is that it seems to me that timing is more of an art than a science. The markets are fickle things, driven by human emotion/herd mentality. No two corrections/crashes are the same, so trying to time it mechanically IMO is futile. When I'm trying to time an entry point for example, I'm also trying to put myself in the shoes of other market participants as well as looking at the fundamentals.

    I'd also like to note, just for the record, (and perhaps it's just me?) but I've found it much harder to time when to sell than it is when to buy. This has caused me to adapt my strategy. Basically I only buy occasionally (aiming for the only the best opportunities usually), and then hold for as long as possible (within reason) to let my investment grow as much as possible, which is the "time in the market" part of the equation.

    It is still early days for my portfolio, but so far I'm very encouraged by the gains my portfolio has made since I've tried to time the market. I would however recommend caution if anyone is trying to copy my style. Start off slow (with relatively small amounts), and see how well it works for YOU before you commit to it as a standard practice for your portfolio.

    One of the reasons I think this has worked well for me is because I tend to invest in relatively "risky"/volatile funds, and I can see why it has the potential to "back-fire" on me, but I ONLY invest in funds/sectors which I'm reasonably confident can do well going into the future, and I always try to have more cash waiting so that I can buy more if a fund I've bought continues to fall.

    Even though I'm buying risky/volatile funds, since I try to buy after/during a sector has hit rock bottom, that means that downside tends to be limited (even if my timing is a bit off), but there is plenty of potential upside. Obviously there are no guarantees, but then having further cash on hand is a secondary safety net of sorts. Worst case scenario is that I end up holding an asset that may not perform for years, but I'm willing to do this, and when the situation reverses I eventually get my pay off.

    The overall effect of this strategy on my portfolio is that my portfolio gradually (5-10% at a time) is being re-invested at the "bottom" of the market, and the more I do so, the more my portfolio out performs. How much of this is due to pure luck I don't know, but it's working for me at the moment so I will continue to do it.
  • MPN
    MPN Posts: 365
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    StellaN wrote: »
    I personally agree with your particular view, however, a good friend very recently(this week) sold her investments because she was ecstatic about the money she had made over the past 6 years. She is fully aware that she may 'miss out' on future growth in the immediate future but she was more than happy to take her profits out now and will wait to reinvest at a later date!

    It's all a matter of opinion and personal preferences but I can't really blame her for making this decision, although as I said it wouldn't be my choice.

    Well if she was 'ecstatic' with the profit she has made then, as you say who can blame her and if the markets do fall considerably in the next few months or in the next year she will have made the right call - but who knows!

    The important point is that it sounds like she is more than happy with her profit margins and decided to withdraw and re-invest at a later date.
  • EdGasket
    EdGasket Posts: 3,503 Forumite
    It's tempting to take everything out of shares but how do you know we aren't at the start of another 20 year bull run like in 1980?
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