Does Market Timing Really Exist?

Does Market Timing Really Exist?

Written by: Jason Lawit | Senior Managing Director at Northern Trust

With markets again at or near all-time highs there has been a refreshed round of calls for caution and timing. Market timing is an attempt to sell one security and buy another and benefit in the trade. The common example is selling stocks and buying bonds when you think the stock market is overpriced and due for a downward price adjustment. The hope for the strategy is you will get out of the stock market, avoid a downward price movement and then re-enter the market at a more attractive price point. 

Let’s take a step back and consider the components of market timing. If prices of public securities (both stocks and bonds) are fair (i.e., all available information is incorporated into price), how can you time the market? You would be merely trading one properly priced instrument for another. Because the price of a public security (both stocks and bonds) reflects all current information, by definition – only new information will change the current price. New information is unknowable. Accordingly, market timing is an illusion and, perhaps (as discussed later), a harmful illusion.

The suggestion public market prices are fair is supported in a number of ways:

1. The sheer volume of daily trading which supports the equilibrium price.

2. The weight of academic research which does not find the existence of mutual fund managers who add value above risk adjusted return (See, Fama and French, “Luck vs. Skill in the Cross Section of Mutual Fund Returns,” Journal of Finance (2010)).

Related: The Secret of Investing

3. Review of live performance of active managers.

So what really happens when you attempt to market time (sell stocks and buy bonds)? 

You reduce risk and expected return in your portfolio. You do so in a ratio that is fair and currently reflected in market prices. If you do not need the higher returns of equities through time to help fund your goals, you might be fine. You just exhibited a risk preference related to your fear of the unknowable. If, however, you do need to capture equity returns through time to have an expectation of being able to fund goals far off in the future – your fear of the unknown may have just diminished your chances of successfully funding your goals. And, don’t forget, future market timing cannot be relied upon as a mechanism to have your portfolio catch up to where it needs to be to fund goals. 

So, if you are relying upon your (or someone else's) ability to market time to help you fund your goals, you are likely to fall short. Not because prices aren’t fair, but because market timing does not exist and your behavioral biases will be quietly working against you.

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Most Read IRIS Articles of the Week: March 19-23

Most Read IRIS Articles of the Week: March 19-23

Here’s a look at the Top 11 Most Viewed Articles of the Week on, March 19-23, 2018

Click the headline to read the full article.  Enjoy!

1. Multi-Factor or Not Multi-Factor? That Is the Question

Let’s pretend you are a US investor that wants to deploy some of your money overseas.  You think international developed market stocks are attractive relative to US stocks, and you also think the US dollar will decline over the period you intend to hold your investment.  — Chris Shuba

2. The Lies Spread by Bankers About Cryptocurrencies

I had a chat with The Financial Times the other day, and provided lots of background as to why I don’t think cryptocurrencies are the choice of criminals. The comment that was reported was the following ... — Chris Skinner

3. Alternative Investments? You May Need New Shock Absorbers!

During the tumultuous red and green gyrations of the capital markets this year have your clients anxiously called to ask: “What’s going on with my portfolio?” What do you do when the usually smooth ride in your luxury automobile becomes as bumpy as Mr. Toad’s Wild Ride in the Happiest Place on Earth? What does the average investor do? — Ted Parker

4. Why Fear of Inflation Is Rattling Investors

Inflation is a bad thing, right? It make things more expensive, right? For those of us of, let’s say, a certain vintage, we recall the runaway inflation of the late 1970’s and early 1980’s. So why does the Federal Reserve – in charge of managing the country’s currency and value thereof – actually try to create inflation? It’s called the inflation targeting and it matters to your money. — Bill Acheson

5. The Best Retirement Investments for a Steady Stream of Income

As you near your 60’s, your prime earning and saving years will transition into a period of time where you get to enjoy the “fruits of your labor,” a.k.a retirement. We call this segueing from accumulation to decumulation, the period when you will be drawing from your accumulated nest egg. Dana Anspach

6. An Emerging Theme In Thematic Investing

Exchange traded funds (ETFs) are popular vehicles for market participants looking to engage in thematic investing. Thematic investing looks to take advantage of future growth trends, including disruptive technologies. Given that forward-looking approach, stock-picking in the thematic universe is equally as hard, if not harder, than in traditional market segments. — Tom Lydon

7. 8 Winning Questions You Should Be Asking Every Prospect

It’s not enough for your salespeople to be product experts, they also need to be capable of having the kind of conversations that position them as business experts and even strategic resources. — Lisa Rose

8. 10 Steps to Successful Strategic Alliances

Business growth doesn’t come from wishful thinking. As you know, it takes a lot of hard work. The growth of your business is not an option – it is a necessity. Coordinating the right mix of strategies to gain market share and improve client acquisition rates is essential to advance your firm in today’s economy. — Michelle Mosher​​​​​​​

9. Keep It Light: Harnessing Humor for Financial Marketing Success

It’s undoubtedly true that investors’ financial security is no laughing matter, and this is reflected in the stolid, dour, reliable imagery and branding that is, by and large, the industry standard. This is hardly surprising—investors need to believe they’re placing their hard-earned money in the hands of experienced, trustworthy professionals. — Alexandra Levis​​​​​​​

10. Do the Economics of a Move to Independence Really Add Up?

The number one question advisors ask when exploring a move to independence is how the economics compare to accepting a recruiting package from a major firm. It’s certainly a valid concern, because while the recruiting deals being offered by the wirehouses are down, it is still very possible for a top advisor to get a really attractive hard-to-pass-up offer. — Mindy Diamond

11. Four Big Reasons Why Short-Term Muni Bonds Should Excite You

Municipal bonds might not be the first thing that comes to mind when you think of a sexy investment. They don’t typically command news headlines like the stock market or bitcoin. — Frank Holmes

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