Why is 'Timing' the market bad ?

SteveG787 wrote: »

1 & 2 are VERY sensitive to parameter change, a small change of start point can change the whole thing.

Four things I have learned about investing.

(i) The advantages of equities over alternatives (even cash) are routinely overstated.

(ii) Nonetheless you need equities in a long term portfolio if you are to try to keep up with price inflation or earnings inflation.

(iii) If you buy shares when they are good value you can reasonably hope for a good return from them over the next few decades; if when bad value, you should expect a poor return. The best available measures of value are the Case-Shiller CAPE and Tobin's q; each makes economic sense, and they tend to agree with each other well on the two most studied markets (USA and UK).

(iv) When professionals talk about 'risk' they really mean volatility. For you 'risk' might mean something quite different e.g. not achieving the standard of living you had hoped for.

The real problem with all of these reversion to the mean (RTM) indicators is that they don't say when, or from what level the RTM will happen. Yes, valuations are above the long term mean and yes geopolitical issues abound (Brexit / Trump). let's assume that will 100% cause a pull back. Two questions, when will that pull back (or RTM) start (so you can move to more defensive investments) and when will the pull back end (so you can move back to equities)?? No, me neither, so just choose a mixture of investments that cover more bases than just equities and then rebalance anually to invoke some kind of 'buy low, sell high' methodology.

k6chris wrote: »

The real problem with all of these reversion to the mean (RTM) indicators is that they don't say when, or from what level the RTM will happen..

I disagree. The real problem for many investors is likelier to be that it's possible that those indicators never give an unambiguous signal during their investment career. Timing the market is a fool's errand if all you are doing is trying to fidget around with minor fluctuations in CAPE, say. But occasionally the graph screams "sell", for instance in 1999. I sold all our equities am very glad that I did. "You were lucky" fools will say. No; I was listening.


http://www.multpl.com/shiller-pe/

economic wrote: »

i prefer to look at whats driving the market higher and whether its sustainable.

I've not suggested that you shouldn't; in 1999 it seemed to me that it was optimism and recklessness feeding on themselves, all supported by Mr Greenspan's folly. The markets were dragged up to loopy levels by a modest number of stocks many of which had no profits and, indeed, virtually no revenues. Moreover I kept meeting people who were not very clever but were earning large salaries for doing jobs that made little sense. It all seemed like a madhouse. But I also read around and carefully checked CAPE and q, and listened to them.

economic wrote: »

dot com was obvious given the tech company valuations were just crazy.

It wasn't obvious to everyone. In the City the prominent fund manager Tony Dye was sacked for holding to his view that it was all mad. About a month later the crash began, proving him right. He was sacked in spite of having an excellent record, having been conspicuously right about the madness in the Japanese stock market in the previous decade. The bloody fools who had been wrong both times kept their jobs.

economic wrote: »

now its about capital fight and simply that there are very few places to park money.

Yes, it was easier to grasp the nettle and sell back then because gilts looked to be offering a good haven; and so it proved. As long as zero interest rate policies, and QEs, continue, it's harder to know what to do than was the case in '99.

Our Central Bankers and politicians have got us into a fine old mess. And it's our own ruddy fault: we are the electorate.

If a simple (or even very complex) mechanical process was possible then someone would have done it already. You could set up a model with very little capital just making a small bet on the market movement each day based on distance from supposed long term trend.