Why is 'Timing' the market bad ?

Timing the market is good. It's also bad. The difference is timescales, what you do instead and what your objectives are.

While fund managers can and do beat the market over extended times and can be selected in advance to some degree, they have a tougher time than private investors. Their problem is the one Neil Woodford experienced back in the years before 2000 when he was avoiding tech. Since he was avoiding the hot sector that caused money to leave the funds to chase the returns he wasn't showing and came close to getting him fired even though he was right.

Don't expect many professional managers to do that. Their incentives are more based on short term funds under management, not fund investment performance directly. Getting fired for being right isn't career-enhancing.

In the very short term markets have so much jitter that it's not very easy to gain from timing. Go up to a few months and there are momentum strategies that can work and most money just ignores them, so they can continue to work. Go longer term and the ten year cyclically adjusted price/earnings ratio is inversely correlated with future investment returns in every major equity market. High PE10, low future returns. But it doesn't come with a timing guarantee and you could wait a long time, or a week, for it to come true. As a drawdown strategy it's been shown to be a useful tool and the basis of Guyton's sequence of risk reduction approach, where it works to improve safe withdrawal rates by switching to lower equity percentage at high PE10, then back at lower PE10.

Say you want to follow that sort of thing, where do you put the money? Bonds are far from being a good choice at the moment. I chose to greatly cut my equity percentage from close to 100% by switching a lot into P2P. With nominal returns in excess of 10% that's well above historic equity returns, though not as good as many equity markets in the last year. Will it work well longer term? I don't know, but probably - assuming that PE10 doesn't stop working as a projector of future returns. But when? Consult your favourite deity. And while it's very unlikely, we could see an equity bull market delivering more than my alternative until I'm dead. Or more likely not and me switching back to equities at nice prices having experienced lower volatility.

If I hadn't had P2P to use, the trade off between equity and fixed interest would have been far tougher. And I still have a lot of money in equities.

It'll be interesting to see how my choice has worked out once the required events have happened. Those events are the next big equity drop, me switching back to high equity percentage and a subsequent equity recovery. Until then, I'm content to have some of my money under-perform what is probably, but might not be, the tail end of a long equity bull market.

And nobody gets to fire me for under-performing the equity markets for a while.

It'll be interesting to see how it turns out.

Meanwhile anyone with a nice long time to go until they need the money and a sufficiently high risk tolerance might consider doing what Shiller, he of the PE10, mentioned for young investors: leveraged long term equity tracker investing. Not daft leverage levels! I've used doubly leveraged equity trackers at times and will in the future.

jdw2000 wrote: »

Really is a great resource.

Yes, it is for anyone who wants to follow their poor performance.

You can stop screaming at me now.

Let's look at what they wrote:

"That’s 11.4% annualised, or around a 9% real return – far higher than the historical average of 5% we might expect from a 100% equity portfolio. Happy times.

By way of comparison, our portfolio’s real return was about 4% annualised when we took a snapshot this time last year."

Look at that volatility of returns, in six years of largely bull equity markets a swing between 4% and 11.4% six year annualised return. And they haven't even seen a notable bear market yet.

Contrast with the under-stated 10% nominal that I use for P2P, with low volatility.

Equities are good and the right place to be for a lot of money long term but it is worth paying attention to what else is around and considering some use of things that have interesting properties. Sometimes you can find interesting niches to exploit, for as long as they last.

They and I do have something in common, though: "Our biggest holding - the Developed World excluding the UK - put on 29%". Mine too. I'm currently sitting on a 114% gain on my SIPP's Vanguard FTSE Developed World ex-UK Equity Index fund holding.

There are two models of investment; to reach a specific capital amount (for example to pay off an interest only mortgage or to buy an annuity) or to fund an ongoing income, for example a pension in drawdown. For the former, as you near the endpoint, either time or value-wise, the impact of a market pullback is very significant and whilst 'timing the market' may not be possible, prudent reduction of the impact of such a pull back can (and perhaps should) be made by reducing the percentage of higher volitile assets into lower volitile ones, for example shares into cash. This is the traditional pension pot to annuity model.

Where many people struggle is with the second model, that of investing for drawdown. In this model, the primary goal of your investing and drawdown strategy is to provide an ongoing, multi year ability to drawdown an amount of money from that investment. Let's take an example of someone aged 60 with a £100,000 pot who wants to draw down £4,000 a year, rising with inflation (for the sake of easy maths). The focus of the investor should be to have a sound plan that maximises the chance of being able to draw that annual figure for 20-40 years. During that extended time period, it is very likely, based on what has happened in the past, that their investment will suffer a number of subsantial pull backs and that over time will recover (I'm assuming sensibly spread equity portfolio here). To mentally cope with this the investor should focus on the question of being able to get there next "£4k" rather than the fact their portfolio has gone down (or indeed up) by xx%. Ignore the absolute value of the pot and focus on the overall plan; balance of portfolio, drawdown methodology etc.

That fear, which we all have, of the market crashing 3 minutes after you have pressed the 'invest' button is normal. One way to overcome it, from a mental perspective, is to build into your plan that you will invest a third of the £100k now, then the next third either when the market has either pulled back by xx% or in yy months time (which ever comes first) and the final third after a pull back of zz% or nn months (whichever comes first). Write the plan on a sheet of A4, along with your portfolio rules / logic and your withdrawal rules. THEN STICK TO THE PLAN. If you plans said a 10% pull back, don't fall into the trap of thinking "I'll wait, it might fall futher", because the bigger the pullback gets, the more likely it will 'feel' the wrong time to invest. If you have a plan you can't stick to, then create a plan you can.

There is no perfect investment strategy, investing is a risk / gamble / has randomness in it. Your plan does not need to be the best plan ever or indeed better than someone elses alledgedly is, it needs to deliver the objective you are aiming for. Focus on what you are trying to achieve in the long term rather than what is happening in the short term.

Eyes-on-the-prize.....

jdw2000 wrote: »

We can all pull numbers out of our backside. How about this: My portfolio made 200% in the last 6 months!

Congratulations. I hope that you sustain that during the next 45% equity drop.

jdw2000 wrote: »

If you think Slow and Steady is not good, then show us your own portfolio. As un-stellar as you think it is, it will have almost certainly beat most investors.

It's a reasonable example of what it set out to be. A portfolio of trackers with medium-high volatility that so far has not lived through a period of substantial bear market. If you want to beat it you might consider swapping out some of the fixed interest for some P2P and maybe considering whether it has an appropriate asset mix for the current situation.

I stopped giving substantial descriptions of my whole investment mixtures quite some time ago for a range of reasons including:

1. People showing signs of copying me, when I have a volatility and risk tolerance well above average, so that is something I think I need to discourage by making it hard to do.
2. A material proportion of what I now do is in opportunities that could vanish if they became too well known. To protect my own returns I need to avoid saying things that can point people to what I do in those areas.
3. I don't want to do the work.

I've a high P2P weighting and a global tracker is my largest equity holding, with the same one also the largest Slow and Steady holding. My actual P2P return in recent years is higher than the return of the Slow and Steady portfolio and its fixed interest part, with far lower volatility in both that and my overall mixture.