The Problem with Market Timing

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Rick Ferri
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The Problem with Market Timing

Post by Rick Ferri »

Nothing sounds more appealing than market timing. It's so obvious: buy low and sell high. Only a fool would do anything else. Well, the world must be made up of a lot of fools because most investors do the opposite.

See The Problem with Market Timing

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Tanelorn
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Re: The Problem with Market Timing

Post by Tanelorn »

Do you think aggregate fund flows chase equity returns or drive them?
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Rick Ferri
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Re: The Problem with Market Timing

Post by Rick Ferri »

Mutual fund investors are trend followers - so there may be some momentum effect. However, behavior seems to vary with trend factors such as the duration, speed and depth. I haven't seen much work done on this. It would be a good study for a PhD student.

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TheTimeLord
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Re: The Problem with Market Timing

Post by TheTimeLord »

Rick Ferri wrote:Nothing sounds more appealing than market timing. It's so obvious: buy low and sell high. Only a fool would do anything else. Well, the world must be made up of a lot of fools because most investors do the opposite.

See The Problem with Market Timing

Rick Ferri
Would part of the problem with market timing for index investor be the amount of time between corrections and bear markets and the discipline required to wait for theses events to invest?
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methree
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Re: The Problem with Market Timing

Post by methree »

Thanks for the post.

From the article:
Successful market timing requires two correct decisions: when to get out and when to back get in. Guessing right once is a 50/50 proposition. Guessing right twice drops the odds to only 25 percent.
I'm new to these discussions, and certainly your statement is widely accepted as fact, but I can't quite follow the logic.

Imagine an investment with a long-term negative price trend. (I don't have a good example, maybe three-legged race horses.) For a negative investment, market timing will tend to outperform buy-and-hold. The fact that I need to make two decisions is irrelevant, IMO.

It's also irrelevant in a flat or rising (long-term) price trend. If I make one good decision, I'm set up for success even if the other decision is chosen randomly. In other words, I can be successful with a good decision + an indifferent decision.

Stock market timing is impaired by "costs": transaction fees, tax implications, and most importantly, the unfavorable effect of parking in an investment with inferior long-term performance. I agree that it's a challenging endeavor.
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Re: The Problem with Market Timing

Post by Johno »

methree wrote:Thanks for the post.

From the article:
Successful market timing requires two correct decisions: when to get out and when to back get in. Guessing right once is a 50/50 proposition. Guessing right twice drops the odds to only 25 percent.
I'm new to these discussions, and certainly your statement is widely accepted as fact, but I can't quite follow the logic.

Stock market timing is impaired by "costs": transaction fees, tax implications, and most importantly, the unfavorable effect of parking in an investment with inferior long-term performance. I agree that it's a challenging endeavor.
I agree the quoted statement in the article is a clever turn of phrase that might have the right message for most investors, but doesn't actually make sense. If you can gain X from a right decision and lose X from a wrong decision at 50-50, the distribution of results after two decisions is 25% 2X (right, right), 50% 0 (right/wrong, wrong/right) and 25% -2X (wrong, wrong), with expected value zero. What makes it negative are real world considerations like transactions costs (or extra taxes) and expected return you miss while out of the market (which depends how long), assuming 50-50 and no skew toward losing more on bad decisions than you gain on good decisions.

And the latter dynamic, rather than greatly increasing the 50% of nominally 'right' decisions, is arguably where skilled traders mainly achieve their success. It's also arguably where people mentally unsuited for trading mainly lose money, rather than being wrong at the general direction of the market a lot more than 50% of the time. Of course neither of the previous statements would make any sense if market movements were completely random, but they're not necessarily. The existence of bad traders can explain the existence of good traders, as long as the market's movements, while not totally random, are random and confusing enough to obscure underlying skill or lack thereof to a significant degree and for significant periods. The average dollar in the market can't beat the market, that's axiomatic. The non-existence of trading skill per se is much harder to prove.
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Re: The Problem with Market Timing

Post by dl7848 »

methree wrote:Thanks for the post.

From the article:
Successful market timing requires two correct decisions: when to get out and when to back get in. Guessing right once is a 50/50 proposition. Guessing right twice drops the odds to only 25 percent.
I'm new to these discussions, and certainly your statement is widely accepted as fact, but I can't quite follow the logic.

Imagine an investment with a long-term negative price trend. (I don't have a good example, maybe three-legged race horses.) For a negative investment, market timing will tend to outperform buy-and-hold. The fact that I need to make two decisions is irrelevant, IMO.

It's also irrelevant in a flat or rising (long-term) price trend. If I make one good decision, I'm set up for success even if the other decision is chosen randomly. In other words, I can be successful with a good decision + an indifferent decision.
I think the normal strawman is that it is assumed that market timers are trying to identify the exact top and the exact bottom, and that is, or course, impossible. Some market timers aim to capture the main part of a trend. If a trend has three parts -- the early rise off the bottom, the middle part of the trend, and the end of the trend -- they will aim to capture the middle part and will be happy with those returns. Others will try to capture the beginnings and/or ends as well, which obviously involves harder decision-making, but through time, the successful traders will come up with a system that works for them.
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Re: The Problem with Market Timing

Post by Dale_G »

Nothing brings out "successful" market timers like a 5 year bull market. I'd like to hear from the timers in real time (not months or years after the fact) when they expect the market to turn down and cash out - and then later, again in real time, when they decide to get back in the market again.

Yup, 25% may be right on both selling out and buying back in - and we will definitely hear from them. The other 75% will quietly fade away.

Anyone who can document successful market timing over a period of 5 to 20 years should be looking for a very well paying job at Fido, Merrill or Goldman, among others. The more successful calls, the shorter the wait for that great job.

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Re: The Problem with Market Timing

Post by Boglenaut »

See today's front page of the print edition of the WSJ:

"Big Investors Lose Even as Markets Rise"

I googled it and found this (not sure if locked to non-subscribers or not):

http://online.wsj.com/articles/hedge-fu ... 1402613770
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Re: The Problem with Market Timing

Post by livesoft »

I enjoyed Mr Ferri's article especially the parts about unintentional market timing. The RBD method is one way to address unintentional market timing.

By putting a statement such as "One MUST buy on an RBD" in their investment policy statement, there is no wishy-washy behavioral finance trap of staying out of the market because it is rigged. Essentially, one is forced to buy despite all their fears and irrational feelings.

A second thing, too: The RBD strategy must be twice as good as regular market timing because it says absolutely nothing about when to time the sell. Thus, one does not have to be right twice. One only has to be right once when they rebalance into an equity asset class on the RBD. :twisted:

And for Dale_G: RBDs are announced on the forum when they happen, so that you can hear from timers in real-time.
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dl7848
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Re: The Problem with Market Timing

Post by dl7848 »

Dale_G wrote:Nothing brings out "successful" market timers like a 5 year bull market. I'd like to hear from the timers in real time (not months or years after the fact) when they expect the market to turn down and cash out - and then later, again in real time, when they decide to get back in the market again.
Actually, trading boards are probably the only place where people are honest enough to post in real time and even post dollar amounts.

But most of these traders are not "predicting" what the market will do . They are simply identifying good entry points, riding the trend, then exiting. In fact, they call it "looking for good set-ups". Nothing so grandoise as calling the top of the Dow. With a few exceptions, those claims are more the province of public personalities with newsletters to sell.

But the type of traders you'll find on this board aren't even as ambitious as the ones you'll find on trading boards. I would guess that most of us only make a few trades a year. We simply want good returns without having permanent exposure to the market. Or we may stay in the markets, but take some profits every now and again, and make occasional bottom-fishing buys during market panics. We are Boglehead in the respect that if we do want equity exposure, we favor index funds.
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Re: The Problem with Market Timing

Post by Dale_G »

livesoft wrote:And for Dale_G: RBDs are announced on the forum when they happen, so that you can hear from timers in real-time.
And I haven't seen a RBD since mid-October of 1987. The low for the market though was in early December 1987, so then would have been a better time to buy. Did you buy October 16th (the first RBD), October 19th (a really good RBD) or later?

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Re: The Problem with Market Timing

Post by livesoft »

Dale_G wrote:
livesoft wrote:And for Dale_G: RBDs are announced on the forum when they happen, so that you can hear from timers in real-time.
And I haven't seen a RBD since mid-October of 1987. The low for the market though was in early December 1987, so then would have been a better time to buy. Did you buy October 16th (the first RBD), October 19th (a really good RBD) or later?

Dale
I have purchased more shares on many RBDs, but not on those days. I remember where I was and also know that one could not reach their financial institution by phone those days because of the call volume. I remember an employee of mine trying to call Fidelity all day from work. I do not believe they had internet orders in those days even though I had e-mail and a very good internet connection back then, but I could be wrong. Do you know?

Another minor problem was that I had no money back then to invest quickly as well since it was all invested in equities or TIAA traditional annuity.
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Re: The Problem with Market Timing

Post by abuss368 »

Hi Rick,

Great article. Thank you for sharing your investment expertise with us and devoting your time!

Best.
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Re: "The Problem with Market Timing"

Post by Taylor Larimore »

Rick:

Great article about a dangerous subject (market timing) that tempts all of us.

Thanks for sharing.

Best wishes.
Taylor
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Re: The Problem with Market Timing

Post by LadyGeek »

livesoft wrote:I enjoyed Mr Ferri's article especially the parts about unintentional market timing. The RBD method is one way to address unintentional market timing.

By putting a statement such as "One MUST buy on an RBD" in their investment policy statement, there is no wishy-washy behavioral finance trap of staying out of the market because it is rigged. Essentially, one is forced to buy despite all their fears and irrational feelings.

A second thing, too: The RBD strategy must be twice as good as regular market timing because it says absolutely nothing about when to time the sell. Thus, one does not have to be right twice. One only has to be right once when they rebalance into an equity asset class on the RBD. :twisted:

And for Dale_G: RBDs are announced on the forum when they happen, so that you can hear from timers in real-time.
Acronym decoder: RBD - Really Bad Day
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Re: The Problem with Market Timing

Post by Rich Cape Cod »

Quite a few years ago I "timed the market." DOW was at around 11,000 to give you an idea of the "when." I pulled out the money in equities of my 457 and, as the market went down to (if memory serves) around 7,000 I kept on feeding my money back in as it fell.

Never do that again!

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Re: The Problem with Market Timing

Post by robertalpert »

It seems to me there is never a way to predict stock market movement by looking at the stock market itself. But are there times when taking queues from the bond market may help? Eg {When the treasury yields inverts (3-month yielding more than 10-year); When the spread between treasuries to junk bonds widens; When money market yields become more interesting; When 10-year treasuries yield approaches 10%}

Is there some validity to predicting stock market crashes then these rare bond market events occur?
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Re: The Problem with Market Timing

Post by sambb »

i have no idea where the market is going, and timing can be bad for the overall market and I am enjoying the discussion here. However, there are events that happen that are obvious game changers. These events have made my financial situation infinitely better than indexing. The first time i held an iPhone i knew it was going to be big. I invested in aapl. The first time i ate at Chipotle, i new it was going to be big, so i invested. I rarely make these bets except when they are obvious. These big bets are absolutely timing, but they benefitted me tremendously. Now that i made the money, i sold and index almost exclusively. It was not luck that these products succeeded - they were obviously superior, and it was pure strategy - but it is also a form of timing.

it is possible to time an individual product that is a game changer. It has worked wonderfully for me, and has changed my finances. I don't plan on doing it again, as I am happy just doing as well as the market without timing it. The best of both worlds, and it has ensured security and safety for my family, in ways that pure indexing would never have done. But yes it was all in the timing of the products that mattered.

I understand it is contrary to the BH philosophy, but it is possible to do better when there are game changing products out there. If timing doesn't work, i would agree for the broad market. But individual components can be timed. I can definitely say that as far a4-5 big stocks that had big gains for me over years. It is actually nice to have that security.
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Re: The Problem with Market Timing

Post by Ged »

livesoft wrote:
Dale_G wrote:
livesoft wrote:And for Dale_G: RBDs are announced on the forum when they happen, so that you can hear from timers in real-time.
And I haven't seen a RBD since mid-October of 1987. The low for the market though was in early December 1987, so then would have been a better time to buy. Did you buy October 16th (the first RBD), October 19th (a really good RBD) or later?

Dale
I have purchased more shares on many RBDs, but not on those days. I remember where I was and also know that one could not reach their financial institution by phone those days because of the call volume. I remember an employee of mine trying to call Fidelity all day from work. I do not believe they had internet orders in those days even though I had e-mail and a very good internet connection back then, but I could be wrong. Do you know?

Another minor problem was that I had no money back then to invest quickly as well since it was all invested in equities or TIAA traditional annuity.
I had UUCP email at that time through a Fidonet node I ran. At that point it was all R&D, either university or government. Eternal September hadn't started.

1987 was before commercial internet service was available. 1988 was just about the time when the commercial carriers were taking an interest because commercial traffic was forbidden on the national research networks.
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