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  • FIRST POST
    • SteveG787
    • By SteveG787 14th Mar 17, 4:58 PM
    • 36Posts
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    SteveG787
    Why is 'Timing' the market bad ?
    • #1
    • 14th Mar 17, 4:58 PM
    Why is 'Timing' the market bad ? 14th Mar 17 at 4:58 PM
    Like many people I have made a pretty good gain in my funds over the last few years and have been looking at ways of protecting that gain when the market inevitably turns. On this forum and in other places people say 'Timing the Market' is a "bad" thing, but I am not sure why. As a former engineer my method would be a simple mechanical buy and sell process applied to each fund, if it drops from its top price by more than say 10% then sell, when it rises more than a similar amount above it's low price then buy.
    As far as I can see the only problem with this would be if the market turned just after I'd bought or sold in which case I would be left behind and catching up would cost more money.
    Obviously this would cost money while in cash and if catching up is required, but I am starting in the position of already being well ahead of the curve (about 40% gain in 3 years).
    The intention of this is to protect capital while holding on to much of the gain already made.

    Please poke holes and rip to shreds. I realise this is more than likely a bad thing but I'm not seeing it.
Page 5
    • fairleads
    • By fairleads 17th Mar 17, 9:58 AM
    • 580 Posts
    • 148 Thanks
    fairleads
    Why is 'Timing' the market bad ?

    Too much concentration, you'd be better off timing the markets.
    Trading on their volatility and cyclic movements.
    • Malthusian
    • By Malthusian 17th Mar 17, 10:17 AM
    • 2,203 Posts
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    Malthusian
    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.
    Originally posted by AnotherJoe
    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
    • By talexuser 17th Mar 17, 11:14 AM
    • 2,186 Posts
    • 1,657 Thanks
    talexuser
    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
    • By kidmugsy 17th Mar 17, 12:22 PM
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    kidmugsy
    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.
    Originally posted by Malthusian
    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.
    Last edited by kidmugsy; 17-03-2017 at 1:12 PM. Reason: P.S.
    • BananaRepublic
    • By BananaRepublic 17th Mar 17, 1:33 PM
    • 815 Posts
    • 570 Thanks
    BananaRepublic
    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.
    Originally posted by kidmugsy
    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
    • By AlanP 17th Mar 17, 6:59 PM
    • 773 Posts
    • 530 Thanks
    AlanP

    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.
    Originally posted by kidmugsy
    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
    • By JohnRo 17th Mar 17, 7:48 PM
    • 2,347 Posts
    • 2,079 Thanks
    JohnRo
    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 can't solve problems by using the same kind of thinking we used when we created them.' ― Albert Einstein
    'Facts do not cease to exist because they are ignored.' ― Aldous Huxley
    • jamei305
    • By jamei305 17th Mar 17, 7:52 PM
    • 182 Posts
    • 230 Thanks
    jamei305
    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.
    Originally posted by kidmugsy
    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
    • By coastline 17th Mar 17, 9:01 PM
    • 909 Posts
    • 1,046 Thanks
    coastline
    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
    Last edited by coastline; 17-03-2017 at 9:05 PM.
    • EdGasket
    • By EdGasket 17th Mar 17, 9:20 PM
    • 3,456 Posts
    • 1,444 Thanks
    EdGasket
    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
    Originally posted by coastline
    ..if only it were that simple
    • kidmugsy
    • By kidmugsy 18th Mar 17, 1:35 PM
    • 9,328 Posts
    • 6,121 Thanks
    kidmugsy
    The difficulty at the present time is what are the alternatives? ... Cash?
    Originally posted by AlanP
    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.
    • kidmugsy
    • By kidmugsy 18th Mar 17, 1:36 PM
    • 9,328 Posts
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    kidmugsy
    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.
    Originally posted by jamei305
    What makes you think that Shiller isn't a very wealthy man?
  • jamesd
    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.
    Originally posted by kidmugsy
    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.
    Last edited by jamesd; 18-03-2017 at 3:23 PM.
  • jamesd
    The difficulty at the present time is what are the alternatives?
    Originally posted by AlanP
    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
    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?
    Originally posted by Linton
    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.
    Last edited by jamesd; 19-03-2017 at 2:44 AM.
    • coastline
    • By coastline 18th Mar 17, 2:56 PM
    • 909 Posts
    • 1,046 Thanks
    coastline
    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.
    Originally posted by jamesd
    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
    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.
    Originally posted by jamei305
    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
    • By kidmugsy 18th Mar 17, 5:56 PM
    • 9,328 Posts
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    kidmugsy
    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.
    • BrockStoker
    • By BrockStoker 18th Mar 17, 6:04 PM
    • 172 Posts
    • 71 Thanks
    BrockStoker
    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.
    Last edited by BrockStoker; 21-03-2017 at 4:44 PM. Reason: typo
    • MPN
    • By MPN 18th Mar 17, 9:04 PM
    • 187 Posts
    • 59 Thanks
    MPN
    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.
    Originally posted by StellaN
    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.
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