Automated Market Timing

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Automated Market Timing

Post by willthrill81 »

David Jay wrote: Tue Dec 12, 2017 9:08 pmThe appropriate way to have lower risk and a smoother ride is to set your equity allocation appropriately.
That is a matter of opinion, not 'gospel'.
David Jay wrote: Tue Dec 12, 2017 9:08 pmIf this was easy enough to put it into a robo system, how come no Wall Street types can pull it off consistently?
Reasons why fund managers don't regularly implement it have already been put forward, though active investing is still widely used. Many investors have been successfully using market timing for decades, including Paul Merriman.
The Sensible Steward
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Automated Market Timing

Post by willthrill81 »

Thesaints wrote: Tue Dec 12, 2017 6:36 pmThe theory that professional managers eschew strategies that are "too simple" borders on the bizarre.
Bizarre? One could argue that many here have the very same belief. "If it were that simple, everyone would do it!"
The Sensible Steward
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Automated Market Timing

Post by willthrill81 »

unclescrooge wrote: Tue Dec 12, 2017 6:27 pm I don't think any discussion on automated market timing is complete without reference to Meb Faber and his paper "A Quantitative Approach to Tactical Asset Allocation",which you can read here:https://papers.ssrn.com/sol3/papers.cfm ... _id=962461

The popular 2007 paper shows how marketing timing "models have performed well in real-time, achieving equity like returns with bond like volatility and drawdowns."

I highly recommend it to anyone interested in Tactical Asset Allocation.

He even created an ETF to replicate the performance (ticker: GTAA). Unfortunately, this didn't really work in real life and was replaced by GMOM, which has also had poor performance.

Here's an interested blog post on the poor performance: http://www.moneysense.ca/invest/the-fai ... et-timing/
You also need to ask yourself how patient you will be when the active strategy under-performs, as all of them will eventually. According to Faber and Richardson’s own data, the GTAA strategy unperformed the buy-and-hold model in 12 of the 17 years from 1975 through 1991. And including 2013 (using the Cambria ETF as a proxy) it has now fallen short in five straight years, and in eight of the last 11. Active investors may be attracted to low volatility, but they also want comparable performance. How many would continue with any active strategy after multiple years of dismal results like that?

Successful investing is about more than the funds in your portfolio: it also requires a change in thinking. To stick to an indexing strategy over a lifetime, you need to let go of the idea that you can improve it with some kind of active overlay. Before you think you’re adding value with market timing or picking individual securities, remember that the probability of success is low and the potential payoff is small: even the best active strategies cannot hope to achieve more than an incremental outperformance over the long term.

More important, the whole pursuit is an enormous distraction from what’s really important, which is saving regularly, diversifying widely, keeping costs low and tuning out the chatter of those who promise what they can’t deliver.
So read the great book by Meb Faber "the Ivy Portfolio" and follow that instead of TAA.
Thanks for the link. :sharebeer I'm reading his paper and site now.
The Sensible Steward
User avatar
unclescrooge
Posts: 6264
Joined: Thu Jun 07, 2012 7:00 pm

Re: Automated Market Timing

Post by unclescrooge »

Veiled wrote: Tue Dec 12, 2017 7:37 pm
unclescrooge wrote: Tue Dec 12, 2017 6:27 pm I don't think any discussion on automated market timing is complete without reference to Meb Faber and his paper "A Quantitative Approach to Tactical Asset Allocation",which you can read here:https://papers.ssrn.com/sol3/papers.cfm ... _id=962461 The popular 2007 paper shows how marketing timing "models have performed well in real-time, achieving equity like returns with bond like volatility and drawdowns." I highly recommend it to anyone interested in Tactical Asset Allocation. He even created an ETF to replicate the performance (ticker: GTAA). Unfortunately, this didn't really work in real life and was replaced by GMOM, which has also had poor performance. Here's an interested blog post on the poor performance: http://www.moneysense.ca/invest/the-fai ... et-timing/
You also need to ask yourself how patient you will be when the active strategy under-performs, as all of them will eventually. According to Faber and Richardson’s own data, the GTAA strategy unperformed the buy-and-hold model in 12 of the 17 years from 1975 through 1991. And including 2013 (using the Cambria ETF as a proxy) it has now fallen short in five straight years, and in eight of the last 11. Active investors may be attracted to low volatility, but they also want comparable performance. How many would continue with any active strategy after multiple years of dismal results like that?
So read the great book by Meb Faber "the Ivy Portfolio" and follow that instead of TAA.
Thank you for the excellent paper and the review of the ETF's performance. I think its performance is much like what I expected in my OP--lower returns and gentler dips--so it is not as "disappointing" to me as it may be to you. If an investor committed to systematic market timing is willing to accept that market timing will never perfectly time, isn't that expectation of disappointment fundamentally similar to the index investor's expectation of reversion to the mean?

Thanks to many of the references in the wiki and many of the wise people on this forum, I am not duped when something promises higher returns than the market. This thread is not about that...it's about creating gentler dips for the nervous investor. If there is a way to market time without emotion that helps my risk tolerance, isn't that useful?

P.S. for honesty's sake: I did not completely understand the paper at first read. I'm still working on it. I feel that someone should completely read a point before responding and I wanted to explain that the paper will take more time than a polite response dictates.
Most papers take a few reads to comprehend. No shame in that.

I feel you may be over-complicating the situation. Just have a higher allocation to bonds, and maybe international large cap stocks (which are currently cheaper than U.S.stocks) and you'll achieve your gentler ride.
User avatar
unclescrooge
Posts: 6264
Joined: Thu Jun 07, 2012 7:00 pm

Re: Automated Market Timing

Post by unclescrooge »

willthrill81 wrote: Tue Dec 12, 2017 9:19 pm
David Jay wrote: Tue Dec 12, 2017 9:08 pmThe appropriate way to have lower risk and a smoother ride is to set your equity allocation appropriately.
That is a matter of opinion, not 'gospel'.
Could you elaborate please?

Having 50% bonds instead of 20% bonds would lead to a portfolio with much lower volatility and drawdowns. This is fact. How is this opinion?
User avatar
Topic Author
Veiled
Posts: 226
Joined: Sun Oct 15, 2017 7:12 am
Location: Texas

Re: Automated Market Timing

Post by Veiled »

Uncle Scrooge, you brought Christmas early. Reading your post brought me a lightbulb moment about "smoother rides" and "higher returns."
unclescrooge wrote: Tue Dec 12, 2017 9:50 pmI feel you may be over-complicating the situation. Just have a higher allocation to bonds, and maybe international large cap stocks (which are currently cheaper than U.S.stocks) and you'll achieve your gentler ride.
When I was about to reply "but that will get me lower returns," I recalled that literally everyone (except the persistent and much appreciated willthrill) has cautioned me against timing for better returns. I contradicted my own statement:
I'm not interested in higher returns.
I realize that a nervous investor who market times IS looking for higher returns...not higher than the market, but higher than he deserves for his risk tolerance. Now I'm wondering to myself how on earth I didn't see how David Jay's quote from Nisi hit the nail on the head. I'm feeling rather sheepish.

So I have learned some important things:
1) When you own anything besides the entire market and if you do anything besides hold it through everything, you are adding risk. This INCLUDES emotionless tools like software because those are built by people and rely on uncertainties.

2) Models based on backtesting and common sense promise risk-tolerant returns to risk-averse investors. Said another way, the risk-averse investor interested in market timing wants higher returns than his risk tolerance can obtain and (as Nisi and Bogle and everybody say), there is no market where increased risk doesn't come with increased premiums.

This forum is amazing.
User avatar
Topic Author
Veiled
Posts: 226
Joined: Sun Oct 15, 2017 7:12 am
Location: Texas

Re: Automated Market Timing

Post by Veiled »

unclescrooge wrote: Tue Dec 12, 2017 9:55 pm
willthrill81 wrote: Tue Dec 12, 2017 9:19 pm
David Jay wrote: Tue Dec 12, 2017 9:08 pmThe appropriate way to have lower risk and a smoother ride is to set your equity allocation appropriately.
That is a matter of opinion, not 'gospel'.
Could you elaborate please?

Having 50% bonds instead of 20% bonds would lead to a portfolio with much lower volatility and drawdowns. This is fact. How is this opinion?
I think willthrill might admit that lowering the percent of equities will lower volatility, but that this is not the only way. (David Jay's word was "[t]he appropriate way."
aristotelian
Posts: 12262
Joined: Wed Jan 11, 2017 7:05 pm

Re: Automated Market Timing

Post by aristotelian »

Bill Bernstein said on Meb Faber a couple months ago that even though he is against market timing, he will shift a few points when valuations seem high. Arguably that is a version of tactical allocation.

A more extreme version would be to go 100% cash when indicators say the market is overvalued. There was a guy who posted a thread from a couple years ago who did just that.

Do you have the guts to go 100% cash?

Something I have been kicking around but haven't acted upon is the idea of maintaining my stock/bond allocation but tilting toward Long Term Treasuries on the bond side as valuations increase. That would be another form of tactical allocation.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Automated Market Timing

Post by willthrill81 »

unclescrooge wrote: Tue Dec 12, 2017 9:55 pm
willthrill81 wrote: Tue Dec 12, 2017 9:19 pm
David Jay wrote: Tue Dec 12, 2017 9:08 pmThe appropriate way to have lower risk and a smoother ride is to set your equity allocation appropriately.
That is a matter of opinion, not 'gospel'.
Could you elaborate please?

Having 50% bonds instead of 20% bonds would lead to a portfolio with much lower volatility and drawdowns. This is fact. How is this opinion?
It is "an" appropriate way to have lower risk. It is not "the" (i.e. only, best) appropriate way to have lower risk.
The Sensible Steward
aristotelian
Posts: 12262
Joined: Wed Jan 11, 2017 7:05 pm

Re: Automated Market Timing

Post by aristotelian »

Veiled wrote: Sun Dec 10, 2017 1:48 pm In a way, it doesn't matter that much. I'm not as interested in which market timing tool is the most accurate. I'm interested in whether BH would ever consider automatically adjusting their AA.
I think it could be justified on Boglehead principles provided that the strategy was written into your IPS and you stayed the course. Call it neo-Bogleheadism.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Automated Market Timing

Post by willthrill81 »

aristotelian wrote: Tue Dec 12, 2017 10:33 pm Bill Bernstein said on Meb Faber a couple months ago that even though he is against market timing, he will shift a few points when valuations seem high. Arguably that is a version of tactical allocation.

A more extreme version would be to go 100% cash when indicators say the market is overvalued. There was a guy who posted a thread from a couple years ago who did just that.

Do you have the guts to go 100% cash?

Something I have been kicking around but haven't acted upon is the idea of maintaining my stock/bond allocation but tilting toward Long Term Treasuries on the bond side as valuations increase. That would be another form of tactical allocation.
This is a very worthwhile question to ask, and like many others in this thread, it 'cuts' both ways. It takes guts to watch your stocks drop by 50% and not panic sell. It also takes guts to move away from the stocks that have tripled, for instance, in the last X years.

It takes intestinal fortitude to stick with any investment strategy.
The Sensible Steward
User avatar
Topic Author
Veiled
Posts: 226
Joined: Sun Oct 15, 2017 7:12 am
Location: Texas

Re: Automated Market Timing

Post by Veiled »

aristotelian wrote: Tue Dec 12, 2017 10:35 pm
Veiled wrote: Sun Dec 10, 2017 1:48 pm In a way, it doesn't matter that much. I'm not as interested in which market timing tool is the most accurate. I'm interested in whether BH would ever consider automatically adjusting their AA.
I think it could be justified on Boglehead principles provided that the strategy was written into your IPS and you stayed the course. Call it neo-Bogleheadism.
Yeah...that's what I thought and I'm realizing that bogleheadism is a little heterogenous. To quote Ethelred from another thread:
Ethelred wrote: Thu Nov 02, 2017 2:46 pmFor some, the Bogleheads philosophy is about investing in index fundas with low expenses, and that can include the application of Modern Portfolio Theory, factor investing, and whatever other ideas that are of value. For others, the Bogleheads philosophy specifically includes the three-fund portfolio, invested in index funds with low expenses. Diversification means different but related things to these two groups: To the first group, diversification is about maximizing risk-adjusted return on the efficient frontier; to the second, diversification is about "owning the market". Theory and back-testing versus simplicity and philosophy.
User avatar
unclescrooge
Posts: 6264
Joined: Thu Jun 07, 2012 7:00 pm

Re: Automated Market Timing

Post by unclescrooge »

willthrill81 wrote: Tue Dec 12, 2017 10:35 pm
unclescrooge wrote: Tue Dec 12, 2017 9:55 pm
willthrill81 wrote: Tue Dec 12, 2017 9:19 pm
David Jay wrote: Tue Dec 12, 2017 9:08 pmThe appropriate way to have lower risk and a smoother ride is to set your equity allocation appropriately.
That is a matter of opinion, not 'gospel'.
Could you elaborate please?

Having 50% bonds instead of 20% bonds would lead to a portfolio with much lower volatility and drawdowns. This is fact. How is this opinion?
It is "an" appropriate way to have lower risk. It is not "the" (i.e. only, best) appropriate way to have lower risk.
Agreed.

Thanks for the clarification.
paisano
Posts: 43
Joined: Sun Nov 30, 2014 8:44 pm

Re: Automated Market Timing

Post by paisano »

As mentioned on viewtopic.php?t=197984, Barclays has created 67 indexes based on CAPE, and there are a variety of mutual funds, ETNs, and ETFs based on them. So, you can see how this approach has performed so far.

Example sector-based index and a mutual fund with $4.5B following it:
User avatar
David Jay
Posts: 14569
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Automated Market Timing

Post by David Jay »

willthrill81 wrote: Tue Dec 12, 2017 10:35 pm
unclescrooge wrote: Tue Dec 12, 2017 9:55 pm
willthrill81 wrote: Tue Dec 12, 2017 9:19 pm
David Jay wrote: Tue Dec 12, 2017 9:08 pmThe appropriate way to have lower risk and a smoother ride is to set your equity allocation appropriately.
That is a matter of opinion, not 'gospel'.
Could you elaborate please?

Having 50% bonds instead of 20% bonds would lead to a portfolio with much lower volatility and drawdowns. This is fact. How is this opinion?
It is "an" appropriate way to have lower risk. It is not "the" (i.e. only, best) appropriate way to have lower risk.
Will:

I think you focused on the wrong part of the sentence: The intended focus is not the article ("the"), is the adjective ("appropriate"). I will stand by my position that the only appropriate way for the average individual investor to moderate the risk and volatility is to adjust the equity exposure of their portfolio in response to their personal need, willingness and ability to take risk, not in response to market conditions.

Dynamic modification of one's equity holdings (either by percentage in equity or by sector rotation) in response to market conditions is not appropriate for the typical individual investor. As Bernstein writes in "Deep Risk": "Mistiming the market is probably the single most frequent and severe form of permanent capital loss."

I have read enough of your posts to understand your dislike of debt instruments, but I remain convinced that market timing is a fool's errand.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Automated Market Timing

Post by willthrill81 »

David Jay wrote: Wed Dec 13, 2017 9:52 am
willthrill81 wrote: Tue Dec 12, 2017 10:35 pm
unclescrooge wrote: Tue Dec 12, 2017 9:55 pm
willthrill81 wrote: Tue Dec 12, 2017 9:19 pm
David Jay wrote: Tue Dec 12, 2017 9:08 pmThe appropriate way to have lower risk and a smoother ride is to set your equity allocation appropriately.
That is a matter of opinion, not 'gospel'.
Could you elaborate please?

Having 50% bonds instead of 20% bonds would lead to a portfolio with much lower volatility and drawdowns. This is fact. How is this opinion?
It is "an" appropriate way to have lower risk. It is not "the" (i.e. only, best) appropriate way to have lower risk.
Will:

I think you focused on the wrong part of the sentence: The intended focus is not the article ("the"), is the adjective ("appropriate"). I will stand by my position that the only appropriate way for the average individual investor to moderate the risk and volatility is to adjust the equity exposure of their portfolio in response to their personal need, willingness and ability to take risk, not in response to market conditions.

Dynamic modification of one's equity holdings (either by percentage in equity or by sector rotation) in response to market conditions is not appropriate for the typical individual investor. As Bernstein writes in "Deep Risk": "Mistiming the market is probably the single most frequent and severe form of permanent capital loss."

I have read enough of your posts to understand your dislike of debt instruments, but I remain convinced that market timing is a fool's errand.
It is up to the individual investor to determine for themselves what is most appropriate for them. For many, buy-and-hold is perfectly fine. However, not all investors want to either expose their portfolio to the inevitable roller coaster ride that strategy will result in or else limit their volatility by holding a large quantity of fixed income investments (Note that I am not opposed to fixed income, but I and many others are not persuaded by the evidence that it is the only appropriate or the best way to reduce volatility in a typical portfolio). For those investors, market timing might be appropriate. It is undeniable that certain market timing strategies have outperformed buy-and-hold in the past. Whether these strategies will continue to perform in a similar fashion going forward is a matter of conjecture and opinion. But calling it a "fool's errand" seems a bit harsh, especially since the likes of Jeremy Siegel and Paul Merriman have shown themselves to be either open to it or actually practicing it; Merriman has been using it since the 1980s and has reported similar returns to buy-and-hold but with far less volatility. Faber found that using 112 years of data, a 10 month moving average timing approach resulted in far lower volatility and maximum drawdown, in addition to a .86% higher annualized return. Many on this forum would say that this is mere backtesting, but trend following strategies have been successfully used by investors for hundreds, if not thousands, of years. And the statistical likelihood of such a strategy having such performance for 112 years due to random chance is close to zero.

It is up to individual investors to determine what is appropriate for them. All investment strategies carry risk, and investors need to fully aware of all of the risks they are exposing themselves to with their chosen strategy.
The Sensible Steward
magneto
Posts: 1060
Joined: Sun Dec 19, 2010 9:57 am
Location: On Chesil Beach

Re: Automated Market Timing

Post by magneto »

From an old post :-

Benjamin Graham has this to say in The Intelligent Investor. ‘Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he may try to do this : by way of TIMING and the way of PRICING. By timing we mean the endeavour to anticipate the action of the stock …… . By pricing we mean the endeavour to buy stocks when they are below their fair value and to sell them when they rise above such value. … We are convinced that the intelligent investor can derive satisfactory results from pricing …. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up a speculator and with a speculator’s financial results This distinction may seem rather tenuous to the layman, and it is not commonly accepted in Wall Strret.’.

It is difficult to find a reliable measure as is discussed by Smithers’ in Valuing Wall Street who ends up favouring Q. Our own preferred stocks valuation measure is the dividend yield (DY), because it is readily available, quickly comparable between Asset Classes and therefore meaningful. But as DY tends to drift over the decades, maybe in line with the Krondatieff long wave, some adjustment is needed from time to time, dependent on whether markets are capital-hungry or capital-sated (as today). So there we have an immediate problem to blind following of valuation measures!!!

It is difficult to maintain the discipline. William Bernstein has this to say in The Intelligent Asset Allocator. ‘…. when you rebalance your portfolio in order to maintain your target allocation, you purchase more of an asset that has declined in price, and has thus gotten cheaper. When you actually increase the target portfolio weighting of an asset when its price declines and it gets cheaper, you are simply rebalancing in a more vigorous form – you are “overbalancing”. …. Dynamic asset allocation gets a bad rap because most investors change their allocations around in response to changes in economic or political conditions. As we have discussed this is a poor approach . In the author’s opinion, changes in allocation that are purely market-valuation driven are quite likely to increase return. Rebalancing requires nerve and discipline; overbalancing requires even more of both of these scarce commodities. Very few investors, small or institutional, can carry it off’.

http://thismatter.com/money/investments ... -plans.htm
see Constant Ratio v Variable Ratio

There are other aspects to such mechanical adjustments.
+ Whether other Asset Classes are able to offer useful diversification possiblities
+ Whether the investor is giving reasonable thought to the rate at which any target is approached. An immediate jump will unsettle the system; the investor knowingly or not being part of a control system. This applies equally to the popular Constant Ratio Formula Plan

Would also add that it is near impossible to determine whether Constant Ratio or Variable Ratio outperforms, as there are so many means of applying the latter. As noted in previous post it is for individual investors to decide, maybe dependent on how value-concious they happen to be?
Would concur that it is all about investor comfort.
Following own convictions rather than dictates of others.
Being able to 'stay the course' with that conviction whatever that course may be.

.
'There is a tide in the affairs of men ...', Brutus (Market Timer)
Post Reply