Why is 'Timing' the market bad ?

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  • Malthusian
    Malthusian Posts: 10,898
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    AnotherJoe wrote: »
    Can't recall the name, in the same vein, there was a respected economics professor, won all sorts of awards, very credible theories, you read them and though "that makes sense" he then started a fund based on his theories. Lost a boatload of money and shut the funds down very recently.

    I don't think it's the one you're describing (it collapsed in 1998) but it sounds reminiscent of Long Term Capital Management. They had two Nobel laureates on their board.
  • talexuser
    talexuser Posts: 3,494
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    Or what about Manek, he won the Sunday Times Fantasy portfolio 2 years on the trot, winning 100 grand each time, and on the strength of that set up a fund with 10 million of Templeton money. It did ok for a time during the boom and then came the tech crash and the performance has been worst in sector ever since.
  • kidmugsy
    kidmugsy Posts: 12,709
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    edited 17 March 2017 at 1:12PM
    Malthusian wrote: »
    It's not so much that his argument has flaws but that his argument would have been equally valid in every single one of the last 5 years.

    His first graph shows your argument to be false, unless you can tell me why you chose five years. If I assume that Hussman, or someone like him, would say something like "sell whenever my graph crosses 100% on the way up" then four years might be more accurate (though reading his graph with that accuracy is not easy, I admit). If he'd chosen 125% then it would be more like three years, I think.

    But even if you were right, so what? You might as well have looked at that plot in March 2000 and said "I'll ignore so-and-so's advice to sell because he'd have advised me to sell a year ago and I've made a ton of money since then". And then for the next three years you'd have been cursing yourself for being a damned fool and not selling in March 1999 when he recommended it.

    There seems to me to be heaps of evidence that methodical valuation methods can occasionally and correctly advise you to sell: for that extraordinary crash in 2000 Shiller (using his CAPE measure) and Smithers (using "q") published books explaining why you should sell. They were proved right virtually within days. A book takes a while to write and publish but their various articles in the preceding year or two had made the same point abundantly clear. Back then there was a lovely alternative investment available, namely gilts, so that any personal investor who hadn't largely moved from equities to gilts by, say, 1999 was being absurdly reckless, and paid dearly for his folly if he wanted to use his capital in the next decade or so.

    This lesson is so clear that I cannot see why anyone would deny it. 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.

    For many people none of this might matter. It's possible that within their investing careers there will not occur such peaks as 1929 or 2000. But if one does occur it seems to me daft not to take action if the alternative is losing much of your retirement pot.

    I go further: the advice not to try to time the market is best directed at the sort of fretters and fiddlers who would be forever ducking in and out of the market, the sort of chumps who insist on valuing their portfolios every weekend or every month, and fidgeting accordingly. To interpret it as being universal advice for everyone irrespective of their circumstances seems to me to be blinkered folly.


    P.S. Shiller has form: not only did he correctly predict the equity crash of 2000, he went on to predict correctly the subsequent crash in the US housing market. That's a powerful argument for applying rationality to these matters rather than superstition.
    Free the dunston one next time too.
  • BananaRepublic
    BananaRepublic Posts: 2,103
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    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.

    I have always found it very easy to determine when to buy. When a large crash has occurred, and people are saying the world is about to end, that is the right time. I have in the past mis-timed it a bit, but that is the nature of the game, you cannot know for sure. Basically stocks are undervalued when confidence is lost, and overvalued when confidence is too high. I'm just stating the rather obvious. :)
  • AlanP_2
    AlanP_2 Posts: 3,250
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    kidmugsy wrote: »

    Back then there was a lovely alternative investment available, namely gilts, so that any personal investor who hadn't largely moved from equities to gilts by, say, 1999 was being absurdly reckless, and paid dearly for his folly if he wanted to use his capital in the next decade or so.

    The difficulty at the present time is what are the alternatives?



    I'm pondering on this at the moment, less from a specific "market timing" perspective (although it is fundamentally) but from the point of protecting gains made on equities & small amount of bonds in 2 pension pots.

    The first is a DB scheme linked AVC that can be taken tax free at point of taking main scheme. Intention is to carry on for a few more years but restructures and redundancies come around on a regular basis.

    Second is a SIPP that could be used to cover period between leaving and starting main pension, or that we might not need to access anytime soon at all if ever.

    Have had 40% tax relief so current value compared to real cost in "after tax income" is significant.

    Physical property and infrastructure funds maybe? Cash?
  • JohnRo
    JohnRo Posts: 2,887
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    I've come to the conclusion it's unfathomable, whatever you do you're guessing and gambling on what happens next, in the short to medium term at least.

    I'm heavy on global equity and intend to keep it that way whatever the market decides it's going to do. What I am doing though alongside is slowly building a cash allocation intending it to be deployed in a downturn but even that may not pan out as originally intended, it'll probably just end up being a drag on overall performance.

    Time will tell, I suppose it just boils down to doing what feels comfortable and then accepting the consequences.
    'We don't need to be smarter than the rest; we need to be more disciplined than the rest.' - WB
  • jamei305
    jamei305 Posts: 635
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    kidmugsy wrote: »
    P.S. Shiller has form: not only did he correctly predict the equity crash of 2000, he went on to predict correctly the subsequent crash in the US housing market. That's a powerful argument for applying rationality to these matters rather than superstition.

    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.
  • coastline
    coastline Posts: 1,647
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    edited 17 March 2017 at 9:05PM
    Looking at the link below everything is fine at the moment if you're into moving averages as a guideline..

    http://www.cmgwealth.com/wp-content/uploads/2017/03/3.1.3.png

    Easy to set up here for other indices just need to adjust the chart attributes..

    http://stockcharts.com/h-sc/ui?s=%24FTSE

    Some links to corrections going back decades..

    http://investing.covestor.com/content/2014/07/corrections.png

    http://investing.covestor.com/content/2014/08/market-correction.png

    All the way back to 1929 for the major ones of 10% or more.

    http://www.yardeni.com/pub/sp500corrbear.pdf
  • EdGasket
    EdGasket Posts: 3,503 Forumite
    coastline wrote: »
    Looking at the link below everything is fine at the moment if you're into moving averages as a guideline..

    http://www.cmgwealth.com/wp-content/uploads/2017/03/3.1.3.png

    ..if only it were that simple
  • kidmugsy
    kidmugsy Posts: 12,709
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    AlanP wrote: »
    The difficulty at the present time is what are the alternatives? ... Cash?

    Quite right, it seems to me a real problem. The central banks have driven asset prices up and interest rates down.

    We have a lot in cash but as "legacy" ISAs end, and high interest current accounts get full up, we'll just have to grin and bear it. Still I'd rather have circa 1% p.a. from premium bonds than whatever miserable return the professional investment manager is getting from, say, Treasury bills.

    We are considering FX. We already have some ETCs of gold and silver tucked away in SIPPs.

    Another possibility is to say that it's the US market that is particularly high so sell equities there and buy in other markets.

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

    It seems the US market is as expensive as at the Great Crash of '29 but not as daft as at the dotcom peak of 2000.
    Free the dunston one next time too.
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