Market Timing

[JohnB]

People worrying if they have "Enough" get very agitated about Safe Withdrawal Rates and risk profiles. With market timing giving a very wide spread in outcomes, they focus on the 5% of failures, and ignore the 50% which give far more money than they could spend. So all sorts of bond/cash buffers are proposed. But working One More Year could boost your pot by 10%, and then you could stay entirely in equities. But there might be a 1% chance of failure, which leads to One More Year again...

That extra year, however irritating, could eliminate lots of tedious rebalancing and worry, but if you are a worrier, its very hard to tell yourself to stop.

I can't see the market characteristics changing, indeed I reckon with automation the balance between capital and labour will shift to the former, so you should focus on controlling your investments rather than your job.

[OhNoNotimAgain]

There is no one investment policy that is the right one for everyone. Passive investing is a sensible strategy for most people but active investing works just fine for others.

I’ve followed a largely passive route the last few years and it’s worked well but I’m now seeing good value in a number of Investment Trusts and I’m happy to switch subdtantial amounts to them.

It’s what makes investing interesting is the multiple routes to success and reading about different approaches.
The is no one right answer and what works great today may not work so well tomorrow. It’s worth keeping an open mind and being able to change your approach if required.

You are mixing inputs with outputs.

Passive or rules-based investing works because you know what the process is and what the outcome will be; the return of the market.

Active investing is a lottery because you don't know what the manager will do and you have no idea what the outcome will be except that, over time, it will be less than the market because of costs and the investor incurs additional, unknown, risks that will eventually cost him or her even more money than the passive alternative.

Active investing has only worked better for some since QE started because additional risk was rewarded between 2009 and 2016. That trade has gone now and that is why so many ITs have underperformed in the last 3 years .

I disagree that there are multiple routes to investing success in the same way that I disagree that there are multiple routes to flying an aeroplane. Academic theory has demonstrated that for 50 years, but the industry has a vested interest in not adopting it.

[Alaric]

Active investing is a lottery because you don't know what the manager will do and you have no idea what the outcome will be

The number of funds with unlimited discretion to do whatever they want is surely limited. Perhaps fifty years ago they represented a higher proportion of the available fund universe. That means most funds have a mandate to follow. You do then have an idea of what the outcome will be because of the nature of the mandate. By the very nature of the this compared with the market as a whole, some will under perform, leaving scope for others to outperform.

[Rover110]

I have one reason why I can't "time the market". Sorry that it doesn't relate to the current drift of the discussion:

When one key moment for timing the market occurs (I have a crash in mind), I'll be effectively locked-out of the market. As will all others who use the "low-cost" brokers. Even stop-losses just flag that you want to sell; the sale will be done at their next opportunity, by which time the market could have moved a lot further.

Better access to the market would come at a price. Probably worth paying for those with huge amounts to invest.

- Rover

[WorldCupWilly]

Thought this might be helpful too:

From Fundsmith Equity Fund Owner's Manual:

Studies clearly show that most successful fund managers avoid market timing decisions. Apart from an inability to do it well are the potential consequences of even trying it. This is illustrated by the fact that if, for example, you had invested in a UK index fund from 1980-2009 you should have achieved a return of some 700% on your investment.

However, if you missed the best 20 days of stock market performance during that period, that return would have been reduced to just 240%. We do not claim to be able to time buy and sell decisions so as to capture 20 days out of some 7,000 working days.

Pretty compelling reason for not trying it IMHO.

WCW

[OhNoNotimAgain]

Active investing is a lottery because you don't know what the manager will do and you have no idea what the outcome will be

The number of funds with unlimited discretion to do whatever they want is surely limited. Perhaps fifty years ago they represented a higher proportion of the available fund universe. That means most funds have a mandate to follow. You do then have an idea of what the outcome will be because of the nature of the mandate. By the very nature of the this compared with the market as a whole, some will under perform, leaving scope for others to outperform.

Even with narrow mandates, such as Woodford's Equity Income fund, his underperformance of 12% against the index over one year means he has to massively outperform just to catch up and match the index. He can only do that by taking more risk or investing outside the market.

[CryptoPlankton]

Thought this might be helpful too:

From Fundsmith Equity Fund Owner's Manual:

Studies clearly show that most successful fund managers avoid market timing decisions. Apart from an inability to do it well are the potential consequences of even trying it. This is illustrated by the fact that if, for example, you had invested in a UK index fund from 1980-2009 you should have achieved a return of some 700% on your investment.

However, if you missed the best 20 days of stock market performance during that period, that return would have been reduced to just 240%. We do not claim to be able to time buy and sell decisions so as to capture 20 days out of some 7,000 working days.

Pretty compelling reason for not trying it IMHO.

WCW

Whenever I see this argument about the effect of missing the x best days, I automatically think "but what effect would it have on your return if you missed the x worst days?"

Having a casual "Google" on the subject, I stumbled on this article, which I found quite interesting:

http://proactiveadvisormagazine.com/bla ... -outliers/

The article's summary from the analysis:

"I. The stock market historically has gone up about two-thirds of the time.
2. All of the stock market return occurs when the market is already uptrending.
3. The volatility is much higher when the market is declining.
4. Most of the best and worst days occur when the market is already declining. Reason: see #3. Markets are much riskier than models that assume normal distributions can be used to predict.
5. The reason markets are more volatile when declining is because investors use a different part of their brain when making money than when losing money."

One interesting point is that if you miss both the best and worst 1% of days, your return is higher than buy and hold. Also, most of both the best and worst days occur during a declining market, which suggests that missing those" best days" would likely be more than offset by missing those "worst days" if you are out of the market. So the "missing the best 20 days" argument seems a little simplistic to me.

I started out thinking I should be clever enough to make money by timing the market but, after admitting defeat fairly early on, I have been more than happy with the results from a LTBH strategy. Having said that, I'm sure most of us think fairly carefully about our entry points (with reference to historic prices) and so there is probably an element of "timing" in most strategies.

The article quotes the mathematician Benoit Mandelbrot (he of "fractal" fame) from his book (which might be a good read?) “The Misbehavior of Markets”:

“What matters is the particular, not the average. Some of the most successful investors are those who did, in fact, get the timing right.”

[Lootman]

Even with narrow mandates, such as Woodford's Equity Income fund, his underperformance of 12% against the index over one year means he has to massively outperform just to catch up and match the index. He can only do that by taking more risk or investing outside the market.

So if you believe that beating the market is so difficult (and I do not necessarily disagree with that idea) then why are you running a semi-active fund that claims that it can do that? And which has so far not achieved that goal?

[Alaric]

He can only do that by taking more risk or investing outside the market.

Which means you can infer the fund's future behaviour from its past performance.

With accounting being an art rather than a science, there has to be the possibility of identifying some knowledge that the broader market is unaware of. That's more likely perhaps to be avoiding dogs rather than picking winners.

[OhNoNotimAgain]

He can only do that by taking more risk or investing outside the market.

Which means you can infer the fund's future behaviour from its past performance.

With accounting being an art rather than a science, there has to be the possibility of identifying some knowledge that the broader market is unaware of. That's more likely perhaps to be avoiding dogs rather than picking winners.

Past performance is only a guide to future returns for rules-based funds.

Relying on someone's intuition to time the market is like selecting someone to pick the best horse for you in the 2:45 at Kempton.

[GoSeigen]

Having said that, I'm sure most of us think fairly carefully about our entry points (with reference to historic prices) and so there is probably an element of "timing" in most strategies.

Quite right. In earlier days on TMF it was amusing how vehemently the HYP people denied that they were timing the market**, yet they are. No reasonable person would carelessly buy something at what he perceives to be a poor price.


GS

[Alaric]

Past performance is only a guide to future returns for rules-based funds.

The point being that almost every fund is rules based to a greater or lesser extent.

[OhNoNotimAgain]

Past performance is only a guide to future returns for rules-based funds.

The point being that almost every fund is rules based to a greater or lesser extent.

No, if that was the case the financial press would not lionise star fund managers, like Woodford, Train etc. They are applauded, while doing well, for their acumen and savviness.

Journalists won't praise a spreadsheet.

[Alaric]

No, if that was the case the financial press would not lionise star fund managers, like Woodford, Train etc. They are applauded, while doing well, for their acumen and savviness.

They are the amongst the relatively few with an nearly unconstrained mandate. Even there, they probably aren't allowed to bet the farm on one market or asset sub-class.

Fund managers with a rule that told them to invest in fixed interest assets are going to get a low return, low volatility performance typical of fixed interest funds, no matter how good they are.

[Lootman]

No, if that was the case the financial press would not lionise star fund managers, like Woodford, Train etc. They are applauded, while doing well, for their acumen and savviness.

They are the amongst the relatively few with an nearly unconstrained mandate. Even there, they probably aren't allowed to bet the farm on one market or asset sub-class.

Fund managers with a rule that told them to invest in fixed interest assets are going to get a low return, low volatility performance typical of fixed interest funds, no matter how good they are.

Agree 100%. but then OhNo is in a horrible place. He finds that he has to simultaneously both argue that passive is better than active AND that his form of active-passive is somehow better than passive.

Not a job I would want.

[mc2fool]

Past performance is only a guide to future returns for rules-based funds.

As most "rules-based funds" track an index (and most of those track markets), your claim is really that the past performance of indices, indeed markets, is a guide to their future returns.

What is your evidence for that?

[OhNoNotimAgain]

Past performance is only a guide to future returns for rules-based funds.

As most "rules-based funds" track an index (and most of those track markets), your claim is really that the past performance of indices, indeed markets, is a guide to their future returns.

What is your evidence for that?

The Barclays and Credit Suisse annual capital markets reviews.

[Hariseldon58]

If one looks at Funds on the HL web site, you can compare the performance of your chosen fund with other funds, equities or an index.

HL are very helpful and give you a choice of 2252 indexes !

I was doing a bit of research on a UK fund with an interesting take on fundamental indexing, related to income, but when I compared it to the All Share the performance did not incline me to do any further research.

Passive and rules based investing can work well but there are alternatives that also work very well.

[mc2fool]

Past performance is only a guide to future returns for rules-based funds.

As most "rules-based funds" track an index (and most of those track markets), your claim is really that the past performance of indices, indeed markets, is a guide to their future returns.

What is your evidence for that?

The Barclays and Credit Suisse annual capital markets reviews.

Those are simply historic studies. They don't make any claims about their predictive value for future returns.

[TheMotorcycleBoy]

Pessimists buy bonds

Optimists buy equities

What about junk bonds? We bought IPF1 and PMO1 a few months back.....surely that implies optimism?