Your browser isn't supported
It looks like you're using an old web browser. To get the most out of the site and to ensure guides display correctly, we suggest upgrading your browser now. Download the latest:

Welcome to the MSE Forums

We're home to a fantastic community of MoneySavers but anyone can post. Please exercise caution & report spam, illegal, offensive or libellous posts/messages: click "report" or email forumteam@. Skimlinks & other affiliated links are turned on

Search
  • FIRST POST
    • SteveG787
    • By SteveG787 14th Mar 17, 4:58 PM
    • 31Posts
    • 4Thanks
    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 7
    • SteveG787
    • By SteveG787 20th Mar 17, 9:50 PM
    • 31 Posts
    • 4 Thanks
    SteveG787
    OP here. I just want to thank everyone for their replies on this thread, it's been brilliant and I've learned a lot from reading the posts and following the links.
    I'd love to be able to summarise the thread (distill the wisdom somehow) but that's beyond me. I will though highlight a few things that are relevant to me -
    a) Many posters see "Timing the Market" as being synonymous with "Predicting the Future" ie "Reading the Tea Leaves" and draw the obvious conclusion that it won't work. I think that's too narrow and specific a definition and other methods are not so obviously flawed and easily dismissed.
    b) Many posters see this as a method to "beat" the market, ie make more money than staying in. That was not my intention, it was always to protect gains that I had already made (through good fortune rather than any skill of mine). In my mind I am ahead of where I wanted to be and so would be happy to spend some of that (by foregoeing potential gain) to protect capital.
    c) It seems to me that some of the alternative strategies that have been put forward could also be described as Timing the Market. Changing the balance of a portfolio based on an external event, political or economic doesn't seem much different than on an analytical basis as I was proposing.

    While this fascinating debate has been going on I've been running simulations on Excel against a data set I downloaded from a fund that has been running since the mid 90's. It's very basic with the variables being point of entry, downswing to sell point, upswing to buy point, I need to do a lot more work but my findings so far are -
    1) It is possible to beat the market, it just depends on the parameters you use.
    2) It is possible to undershoot the market, again it just depends.
    3) It isn't really possible to lose all your money, but you may have to wait a very long while to get it back. Anyone buying this particular fund in Jan 2000 would have waited 14 years to be in profit again.
    4) 1 & 2 are VERY sensitive to parameter change, a small change of start point can change the whole thing.

    Based on point 4 I have to admit that my simplistic method isn't going to be practical and I need to look further. However I do think the basic premise is still valid that if you are ahead on your terms it is not unreasonable to spend some of the gain in protecting the capital. Finding the method to do that is going to be difficult though.
    • EdGasket
    • By EdGasket 20th Mar 17, 9:57 PM
    • 3,456 Posts
    • 1,444 Thanks
    EdGasket
    You can always find a method that will beat the average for historic data. That doesn't mean it would be any good going forwards.

    You 'protect' your gain by cashing out or hedging using shorts but either method will limit your potential future gains to the extent that you limit your potential losses.
    • kidmugsy
    • By kidmugsy 21st Mar 17, 12:29 AM
    • 9,180 Posts
    • 6,007 Thanks
    kidmugsy
    1 & 2 are VERY sensitive to parameter change, a small change of start point can change the whole thing.
    Originally posted by SteveG787

    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.
    • Eco Miser
    • By Eco Miser 21st Mar 17, 6:26 AM
    • 2,731 Posts
    • 2,537 Thanks
    Eco Miser
    1) It is possible to beat the market, it just depends on the parameters you use.
    2) It is possible to undershoot the market, again it just depends.

    4) 1 & 2 are VERY sensitive to parameter change, a small change of start point can change the whole thing.
    Originally posted by SteveG787
    This is why it is said that you can't time the market.
    It's not possible to pick a favourable start point (or end point) with sufficient precision without the advantage of hindsight.

    It is, of course, possible that the random start point one actually picks turns out to be very favourable, in which case one may claim to have timed the market successfully.
    Eco Miser
    Saving money for well over half a century
    • k6chris
    • By k6chris 21st Mar 17, 7:28 AM
    • 58 Posts
    • 88 Thanks
    k6chris
    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.
    • BananaRepublic
    • By BananaRepublic 21st Mar 17, 8:58 AM
    • 784 Posts
    • 535 Thanks
    BananaRepublic
    Professionals who have more information can to an extent time the market, in that they may move out of raw materials, and into another sector, or move away from Southern Europe into Northern Europe, based on expectations from economic and political events. But an awful lot of active fund managers were taken by surprise by the result of the Brexit vote, and their funds took a hit. And the fact that most active funds do not beat passive funds indicates that foresight is in short supply.
    • kidmugsy
    • By kidmugsy 21st Mar 17, 11:46 AM
    • 9,180 Posts
    • 6,007 Thanks
    kidmugsy
    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..
    Originally posted by k6chris
    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
    • By economic 21st Mar 17, 12:26 PM
    • 1,152 Posts
    • 532 Thanks
    economic
    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/
    Originally posted by kidmugsy
    ths issue with this is at what point do you sell. it could be a screaming sell now to you and you sell. then market rises up to dot com pe level and this happenes over 10 years. you would miss out on growth and diviends.

    i prefer to look at whats driving the market higher and whether its sustainable. dot com was obvious given the tech company valuations were just crazy. now its about capital fight and simply that there are very few places to park money.
    • kidmugsy
    • By kidmugsy 21st Mar 17, 1:01 PM
    • 9,180 Posts
    • 6,007 Thanks
    kidmugsy
    i prefer to look at whats driving the market higher and whether its sustainable.
    Originally posted by economic
    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.

    dot com was obvious given the tech company valuations were just crazy.
    Originally posted by economic
    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.

    now its about capital fight and simply that there are very few places to park money.
    Originally posted by economic
    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.
    • economic
    • By economic 21st Mar 17, 1:14 PM
    • 1,152 Posts
    • 532 Thanks
    economic

    Our Central Bankers and politicians have got us into a fine old mess. And it's our own ruddy fault: we are the electorate.
    Originally posted by kidmugsy
    everything moves in cycles. there will never be utopia for human nature never changes. greed will always exist and this is what drives markets. funny thing is to have it any other way would just be a million times worse
    • Cogs44
    • By Cogs44 21st Mar 17, 2:00 PM
    • 13 Posts
    • 7 Thanks
    Cogs44
    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.
    • Ray Singh-Blue
    • By Ray Singh-Blue 21st Mar 17, 9:19 PM
    • 287 Posts
    • 367 Thanks
    Ray Singh-Blue
    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).
    Originally posted by kidmugsy
    Thanks for this post kidmugsy. I think you have nailed it.
    • Pincher
    • By Pincher 21st Mar 17, 9:31 PM
    • 6,375 Posts
    • 2,412 Thanks
    Pincher
    Have you considered the merit of timing the market when it's OTHER PEOPLE's money?


    If you make money, you get a fat bonus. If you lose, it's the customer that loses.
    What happens if you push this button?
    • Thrugelmir
    • By Thrugelmir 21st Mar 17, 9:58 PM
    • 52,966 Posts
    • 45,314 Thanks
    Thrugelmir
    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.
    Originally posted by Cogs44
    Rumour has it that there's a private hedge fund in New York. Who have designed a computer programme that's accurate at forecasting future market movements.
    “ “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton
    • BananaRepublic
    • By BananaRepublic 21st Mar 17, 10:11 PM
    • 784 Posts
    • 535 Thanks
    BananaRepublic
    Rumour has it that there's a private hedge fund in New York. Who have designed a computer programme that's accurate at forecasting future market movements.
    Originally posted by Thrugelmir
    I am sure you have heard of Long Term Capital Management, and their, ahem, infallible system.
    • economic
    • By economic 21st Mar 17, 10:11 PM
    • 1,152 Posts
    • 532 Thanks
    economic
    Rumour has it that there's a private hedge fund in New York. Who have designed a computer programme that's accurate at forecasting future market movements.
    Originally posted by Thrugelmir
    renaissance technologies?
    • grey gym sock
    • By grey gym sock 21st Mar 17, 10:12 PM
    • 4,012 Posts
    • 3,461 Thanks
    grey gym sock
    P2P is perhaps lower risk than bonds, certainly lower than equities because it's generally secured lending or backed by a protection fund or both. It largely lacks the capital loss potential due to interest rate rises.
    Originally posted by jamesd
    in general, p2p has to be riskier than investment-grade bonds, and is more comparable to junk bonds. it does depend how you do p2p. do it carefully, and i can believe it might be lower-risk and higher-return than most junk bonds. carelessly, and it could be worse.

    IMHO, security-backed lending is a better thing to look for than protection funds. a protection fund depends on the p2p platform - if (for instance) their underwriting is incompetent, and this is exposed due to an economic downturn, then a protection fund could run out. a lot of it still comes back to the soundness of one business - the p2p platform, not the borrowers.

    A sample of some I have or had, simple (no compounding) interest rates before allowing for bad debt:

    1. £30k at 19% to a car flipper featured in a TV series, secured on the cars. Ended last summer.
    2. £10k at 16% for a holiday park development in Scotland, secured on the land and building that will remain. Guarantee by the loan intermediary to cover shortfalls after security sale.
    3. £10k at 14% for a two storey Portacabin building at Pinewood studios that is doing long term renovation, secured on the building and rental stream from Pinewood.
    4. £5k at 14% to a claims management company for postal marketing, secured on land. Guarantee by the loan intermediary to cover shortfalls after security sale.
    5. Circa £25k at 12% to a car HP seller, secured on the HP payments and, if the borrower defaults and the seller also fails, on the cars. Seller takes the day to day credit risk, swapping out defaulted loans as long as they don't fail.
    6. Circa £23k at 12% to an invoice finance firm, secured on the goods, ultimate buyer and 90% credit insurance or letter of credit from UK bank.
    7. Several tens of k at about 16% (there's a profit share component) to a firm importing and reselling or leasing containers, secured on the containers.

    Those tend to be at the higher risk end of what I'll lend on. I tend not to hold to the end of the loan term, that's when the default risk is highest. At the moment it's easy enough to sell though that's not guaranteed.

    The only default I've seen on that sort of stuff was to another container importing firm where the individual behind it seems to have committed several crimes. Their personal assets, including their home, are now at stake, being subject to an order from the High Court. I'd sold most of this before the default. Much easier to steal and sell containers than buildings or land.

    A fair bit of more banal property bridging loans as well as a range of other stuff. Usually I avoid property development loans, too much chance of those being slow to sell or having completion trouble in a residential or commercial downturn.
    that was mostly about how reliable the borrower and loan security are. which is important, but i think the bigger risks are perhaps with the p2p platforms themselves. it's not just about whether they're honest about where your money is going, but also about how good their underwriting process is, and whether there are conflicts of interest (e.g. will they compromise on loan quality to expand their business faster?).

    i suspect it's very difficult to tell how good (i.e. honest, competent, open) a platform is. how much info do you get access to? how much time do you spend examining it, and doing related investigations to test the info? (personally, i wouldn't want to invest a lot of time into this.) are you a professional in some aspect of lending? if not, is your personal attempt at due diligence going to be very effective? [these are mostly meant as rhetorical questions.]

    how many p2p platforms are there that it's worth using? if it's (say) 5, then the platform risk is in a sense comparable with putting all your equity investments in 5 individual companies. which most would regard as extremely reckless. with equities, it's much easier to be diversified enough that you don't care about any individual company going bust.

    on reliability of security: among other issues, i would be concerned about any security whose value is specific to the kind of business using it. e.g. shipping containers might well lose value precisely when the company using them goes out of business, if both are due to a downturn in world trade.

    also, any security with large numbers of relatively low-value items is going to be disproportionately costly to sell, if it comes to that. e.g. i remember reading something about loans secured on jewellery - not that you mentioned that.

    what you're doing may make sense. i'm not sure. but i do think it's difficult, and there are a lot of risks to consider - and keep a close watch on.
    • Thrugelmir
    • By Thrugelmir 21st Mar 17, 10:15 PM
    • 52,966 Posts
    • 45,314 Thanks
    Thrugelmir
    renaissance technologies?
    Originally posted by economic
    Cannot recall who they were. There was an article recently.
    “ “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton
    • grey gym sock
    • By grey gym sock 21st Mar 17, 10:41 PM
    • 4,012 Posts
    • 3,461 Thanks
    grey gym sock
    14 March 2017, "ROBERT SHILLER: 'This market is way overpriced'", referring to the US equity markets. "Its most recent reading on Monday was 29.24, a level not seen since the early 2000s when the internet bubble was leaking." It's currently higher than it's ever been except for the internet bubble and around 1929's Black Tuesday. "He did not forecast a short-term decline in stocks, but told Bloomberg that he wasn't buying more." He said he was now buying outside the US in places with more favourable valuations.

    'Shiller says when markets are as buoyant as they are now, resisting the urge to pile in is hard regardless of what else might be happening in society. “I was tempted to do it, too,” he says. “Trump keeps talking about a new spirit for America and so you could (A) believe that or (B) you could believe that other investors believe that.”' Click on the picture of Trump to watch the interview where he discusses both psychological Trump rise factors and the long term issues, while advising most investors to keep some in the equity market but not go overboard. He mentioned both bonds and equities as over-funded in the same sentence. Yet he also observed that in the short term there could be a repeat of the rise from 1997 and described the situation as very uncertain.

    That didn't use the magic word bubble but way overpriced for both US bonds and US equities is a pretty good alternative phrase.
    Originally posted by jamesd
    comparing the current PE10 (unadjusted) with 1929's PE10 is spurious. the current PE10 should be a bit higher, because of

    1) accounting changes, re writing down assets with impaired values, and re allowing for the cost of employee share options, which have reduced earnings in recent years, and hence increased the PE and the PE10.

    2) greater use of share buy-backs in recent decades. this doesn't affect the PE, but does increase the PE10, compared to what it would have been if the company had paid out the same cash in dividends instead of buy-backs (because - i'm not sure if this explains it properly - the earnings per share from 9 years ago are calculated based on the larger number of shares that existed at that time).

    (there was a series of long articles a few years ago on http://www.philosophicaleconomics.com/ which covered the above 2 points.)

    in any case, shiller isn't selling any US equities, and presumably he already holds a significant amount of them. and he's just making new purchases in non-US equities.

    i've no real argument with that. i would add that, for anybody who has no equities to start with, and is thinking of buying some, the nearest thing to shiller approach would be to include some US equities in that, but underweight the US a bit - not to avoid the US altogether.

    shiller may or may not be making the right move. to come back to the topic, it is timing the market a bit. but in a small way.

    and when you switch to other assets where you expect a decent return (whether that is different equity markets or selected p2p), then timing the market is not nearly as problematic as the classic case of holding a lot of cash, fully intending to put it back into equities, but not until after the market crash, which you insist will happen.

    As you can see from my other posts in this discussion I might well do some short term speculation on a US Trump-related rise in spite of the poor long term context. But that'd be deliberate short term momentum-following speculation, not a long term position.
    well, that's what i'd call really scary market timing

    If you want to see places that were cheap on 21 Feb there's a handy world map here. Relatively cheap included the UK and most of Europe. Plenty of alternative opportunities to stay in equities at lower prices, if desired.
    adjusting your equity allocations to individual countries is generally best avoided, except for the major 3 (from a UK perspective) of USA + UK + japan. you could increase your weightings in UK and europe ex-UK, based on apparent relative value. i've no big argument with that, but it's not a racing certainty to work out. europe may be cheap because it has economic problems (especially, that the eurozone is run with a bias towards recessions).

    i will probably being selling a bit of US equities to buy europe ex-UK equities soon, but that is just rebalancing back to my pre-defined allocations, not changing them. (is rebalancing a kind of market timing? well, sort of.)
    • grey gym sock
    • By grey gym sock 21st Mar 17, 10:49 PM
    • 4,012 Posts
    • 3,461 Thanks
    grey gym sock
    b) Many posters see this as a method to "beat" the market, ie make more money than staying in. That was not my intention, it was always to protect gains that I had already made (through good fortune rather than any skill of mine). In my mind I am ahead of where I wanted to be and so would be happy to spend some of that (by foregoeing potential gain) to protect capital.
    Originally posted by SteveG787
    there is nothing wrong with taking some chips off the table - i.e. simply reducing your risk.

    suppose, due to large gains from volatile investments, you now have enough to retire comfortably and securely, providing you reduce the risk of your portfolio. but that if you keep invested as you are, you're at risk of losing so much that you have to go back to work. it's perfectly rational to reduce risk.

    and i wouldn't call it market timing when you don't intend to increase risk again in the future. it's when you do - e.g. you're holding cash now, but intend to plough it all back into equities later on - that it's clearly market timing.
Welcome to our new Forum!

Our aim is to save you money quickly and easily. We hope you like it!

Forum Team Contact us

Live Stats

1,512Posts Today

7,235Users online

Martin's Twitter