Stock Market Timing: Advice For Investors

by Silicon Valley Blogger on 2009-08-0730

Should you time the market? There’s an easy, short answer and there’s the longer one. The short reply is “no”, a stance which many financial experts will advocate, especially for regular (small) investors. But then again, you think about all the pain caused by the recent stock market implosion and you’d argue that “yes”, market timing would have saved you more than a bundle if you could have done it right. Of course it’s all in hindsight and there will be people arguing till the cows come home that they are “for” or “against” the concept.

As for me, I try to keep an open mind. I am a “moderate” in most everything I engage in. I try to see both sides, try and experiment to see what works then make my decisions based on results. But this doesn’t mean that I won’t try something again even if it has failed me in the past. I chuck it all to “learning experiences”. At any rate, I’ve written about market timing strategies before, where I try to provide justifications for and against stock trading. I’ve also looked into stock charting tools and investment software that trumpet the benefits of technical analysis.

In truth, I’m primarily a fairly conservative investor who highly respects conventional investment precepts and whose core portfolio is in index funds, ETFs and diversified mutual funds. I limit any timing to 4% of my portfolio, or do it as a result of portfolio rebalancing efforts and tax advantaged strategies that I implement. I try to see both sides of the coin, although I am keenly aware of how opinions on this (sometimes) hotly debated topic can vary widely.

stock market timing advice, investors


On this note, let me share with you the thoughts of a fellow blogger, Tim Parker from Elementary Finance, who has decided to engage in some self-reflection about market timing. I asked him the other day: “you’re an astute investor, so what do you think of timing the market?” Here’s his piece:

Some Reflections On Market Timing

Timing: It’s something that I don’t have. They say that comedy is all about timing and I’m not funny. They (I still don’t know who “they” are) say that the best boxers have a natural sense of timing. I guess I won’t be a great boxer either.

Market timing is a different kind of timing. Do you remember the game Othello? Here’s a quick quiz: What was the game’s slogan? Give up? The answer is, “A minute to learn, a lifetime to master.” Market timing is exactly that. The definition only takes a minute. Market timing is simply trying to accurately predict when the market is going to go down and when it will go up. Easy to learn, right?

Here’s the “lifetime to master” part: the odds are stacked against the market timers. Studies show that it doesn’t work in the long run. Most academic types say that because so many variables move the market, it’s nearly impossible to analyze all of them and figure out how they relate to each other in a way that allows the investor to know with any certainty what will happen tomorrow or next week.

Why time when you can hedge instead? I have to admit that I’ve tried stock market timing. In fact, I still engage in this. But these days, I’ve also incorporated a different kind of strategy — I’ve been doing some hedging: I have in my portfolio two ETFs that track the movement of the Dow. One makes money when the market goes up and the other makes money when the market goes down. The only job of these ETF’s is to react to the overall market. The responsible thing that I do is to buy them both as a form of insurance. I buy both because I know that I cannot predict the market movements.

The proponents of market timing say that because they are technical analysts, by reading the charts, they can predict the market moves with a fair amount of certainty, at least with results that aren’t worse than those achieved by fundamental analysis investors.

Stock Market Timing: Advice For Investors

As a part time retail investor, let me offer my opinion: For those of us who are not investing full time, who don’t have time to read every article, analyze every report, or go to dinner with the Wall Street insiders, we have to stay conservative. The statistics show that retail investors don’t make big money (check out this post on why most investors don’t make money in the stock market). I think one of those reasons may be that we tend to take unnecessary risk.

As you think about your stock portfolio, remember that if you’re a part time or small investor, holding on to longer term positions should result in better returns than if you traded in and out of stocks. For thrills, why not just set aside a small portion of your money to play with? Some experts suggest keeping between 4% to 20% of your total portfolio set aside for more adventurous activities (say participating in short term, day trading moves that are a little more fun). Avoid committing any more than that so that you avoid the risk of losing your shirt.

Excellent timing is something that few of us have, so stock market timing may not be the right strategy for you. Stick with the tried and true methods of investing in index funds and picking quality mutual funds and stocks, and committing to them for a long period of time.

Tip: Check out the resources at online stock brokers for more on this topic. Scottrade, TradeKing, ETrade and Zecco have a wealth of information on the stock market, on trading, market timing as well as long term investing strategies that are worth reviewing. It’s free!

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 30 comments… read them below or add one }

Rob Bennett August 8, 2009 at 5:51 am

I believe that looking at how stocks have always performed in the past tells us something about how they may perform in the future. If you go through the historical record (the data is available at Robert Shiller’s web site), you see that short-term timing (changing your stock allocation with the expectation of seeing a benefit in a year or so) has never worked. So I doubt that I could pull it off. The same data shows that long-term timing (changing your stock allocation in response to price changes with an understanding that you may not see a benefit for five or even ten years) has ALWAYS worked. So I believe that the odds are that it will continue to work and that it will work for me.

Why wouldn’t it? The price we pay for everything else we buy affects the value proposition we obtain, does it not? If a dealer asked you to pay $60,000 for a car with a fair market value of $20,000, you would run. But stocks were selling for three times fair value at the top of the bubble and millions of us just kept pouring more of our hard-earned money into stocks. Huh? Was there any way to imagine that that bet (that’s what it was, a long-odds gamble) was going to pay off? There have been four times when stock prices have gone to the levels that applied from 1996 through 2008. The average price drop on those four occasions was 68 percent. No one informed about stock market history should have been even a tiny bit surprised about what happened last year.

The thing that hangs people up about this is that so many “experts” say that timing doesn’t work and people think there must be something to it. There is absolutely nothing to it. People forget that most of the people quoted as “experts” have ties to The Stock-Selling Industry. Go back to the car example. Would you take the word of the car salesman as gospel if he said that paying three times fair value is just fine because buying cars always ends up being a good thing in the long run? I mean, come on. Most of the people we think of as investing “experts” are expert salespeople first, second and third.

Rob Arnott, the former editor of the Financial Analysts Journal, is a straight shooter. He recently said that today’s conventional investing wisdom is the product of “myth and urban legend.” There really are millions of people who believe that market timing doesn’t work. But every one of them believes it primarily because lots of other people who also listen to The Stock-Selling Industry to learn about stocks believe it. I have researched this in great depth and I can say with zero fear of being effectively contradicted that there has never been a sliver of evidence that long-term market timing does not work. If there were any evidence of this, someone would have brought it to my attention (there are lots of people who do not like what I say on this topic).

The problem has its roots in something called “the Efficient Market Theory.” The EMT was developed by lots of smart people who made a huge mistake. The mistake was revealed by research done by Shiller in 1981 (and confirmed numerous times since), but by 1981 there had already been millions spent promoting the Passive Investing idea and at that point The Stock-Selling Industry did not want to admit the mistake.

I am hopeful that the financial pain that has been caused by this mistake had now grown large enough that we are going to be able to get some responsible people involved in the effort to start a national debate on the realities of stock investing. Once we gain the ability to discuss the realities (as revealed by the academic research of the past three decades), there is wonderful stuff to learn. The key to successful stock investing is setting your stock allocation properly, and that is impossible for those who see no need to change their allocations in response to price changes.

Rob

Chad August 8, 2009 at 12:03 pm

Hello Dig
I am a fairly new reader to you blog, but I must say that I have really enjoyed your posts.

Would you mind revealing the two ETF’s (in your portfolio) that you talked about in this post?

Josh August 8, 2009 at 4:14 pm

I have been reading your blog for about a month now. I have yet to post a comment but “Rob” mentioned the efficient market theory. I honestly do not believe the market is efficient. Watch the currency markets for a few weeks, you will see there is a LOT of room to make money by taking advantage of the non-efficient market.

elementaryfinance August 8, 2009 at 8:34 pm

Chad

The two ETFs that I speak of in this article are DXD and DDM. If you are a new investor, I strongly suggest you wait a while before getting in to these. These are called leveraged ETFs and are mostly designed for day-traders. They move at twice the amount of the DOW which make them dangerous. You don’t hedge by buying 50% of each. You decide which way you believe the market is going and buy a majority of ETF that goes up when the market goes in the direction that you believe the market is going.

There are many, safer ETFs that aren’t leveraged that you should look at before looking at these. If you go to elementary-finance.com and contact me, I’ll be happy to send you a spreadsheet of ETFs by sector that you can research.

Jae Jun August 8, 2009 at 10:17 pm

As you point out, very few can actually time the market, especially if you are busy with your life :) I believe the ones that do are lucky. Even so called professionals can’t get it right looking at how volatile the market it.

Thankfully, since no one can time the market, it just makes it easier for the investor that has a long term view and temperament to ignore gyrations of the market.

Good article.

Mike August 9, 2009 at 7:49 am

Modern Portfolio theory and buy and hold sounds very tempting. However, there are apparent downsides. Buying anything (stocks, bonds, mutual funds) need to include an exit strategy and clear thinking.

If you were simply “Buying and holding” a 60/40 mix of stocks and bonds in 2008 as a 64 year old with one year to retirement, you would have potentially lost 40-50% of your past 30+ years of savings and you are facing the probability of not retiring anywhere in site.

Buy and hold is a concept that comes from Wall Streets main objective of collecting and “PARKING” assets. It is an investors lazy way of approaching the financial markets and an advisors best ally for laziness. What are other approaches?

1st. Understand the securities you are investing in and scale back risk where possible. Most corporate bond funds will experience a dramatic drop in value as we enter into a rising interest rate environment. Even long-term Treasury debt will decline. Therefore, you need to hold lower duration bonds that are not negatively affected as rates rise. Specifically, 3-5 year durations and less. So, I would not just hold my bond fund without looking to see what lies beneath. Look inside. Study what is in there. ASK questions. Demand answers. If your advisor can’t give you an answer, politely fire them as they are incompetent. Make sure you are in Short Term bonds in this environment.

2nd. Adjust your Expectations and Realize that we are probably in the midst of a secular bear market for stocks. Stock returns from 1966-1980 were flat. During secular bear markets, there are shorter-term cyclical bull (upside) moves, but the general trend is sideways and down. It is very likely that we will be trending in a sideways to downward trending market for the next 10 years. Case in point: The Dow and SP 500 are where they were 10 years ago. But you’ve taken on a massive amount of risk. Was it worth it to gain 0%?

3rd. Consider investing with an approach of “safeguarding’ the majority (like 80-90%) of your hard earned assets in low-risk investments (for example, TIPS, US T Bills, CDs, annuities, gold and silver bullion as insurance, etc) and only allocating the remaining 10-20% to sectors and areas that are undervalued by general fundamental analysis. This is where you will have to learn strategy and study some. They point is that you are eliminating a high percentage of portfolio risk with a more efficient allocation.

The key here is to make adjustments and not just sit and watch as if you are helpless. Telling people that they can’t time the market, makes them think that they can’t do anything and that is completely inaccurate. Of course people will agree with the premise because it requires 0 work. Buy and hold was a term that gained a lot of traction and actually worked from 1980-2000, the period where most of today’s baby boom population experienced unrealistic expectations and only (and this is where the mentality comes from) upward trending markets. Anyone following this advice in 1995 was pretty much wiped out by spring of 2000.

We have moved into a completely new time in the markets, which requires more discipline and strategy.

You can look at any historical chart and yes, you clearly see the upward moving chart of the DOW, SP 500, etc. over the last 70 years. I get that. The part that is ignored is people enter into the market with approximately 25-30 years to save. We as investors have finite life spans. We experience unexpected events in our lives that jolt our savings (See the last 2 years) Also, companies have finite lifespans. They go out of business. Look at the auto industry, Fannie Mae, Merrill Lynch, AIG, Enron, all blue chip cos we should have held onto.

To assume you can just sit back and throw your hands in the air and say “You can’t time the market gyrations” and expect a handsome return is not only lazy thinking, it’s irresponsible to yourself. It would also be great if I could just start my car and push the gas and ignore the gyrations of the landscape. But I know I am responsible for steering my own fate. But it requires educating yourself, learning, strategy and execution. There are other ways, they just take work. But you’re worth it!

Manshu August 9, 2009 at 4:58 pm

I think Tim is referring to leveraged or inverse ETFs for hedging. Those are inherently risky things, and while Tim may be familiar with them, they are not for everyone.

www.escapesomewhere.com August 11, 2009 at 11:06 pm

I have heard that market timing doesn’t work. But it seems like the big investors (Soros for one) does market timing in the currency market.

While market timing is probably not for people like me who spend a limited amount of time looking at the market, do people think its any more difficult than buying individual stocks?

American Banking News August 13, 2009 at 1:15 pm

I totally agree for the small investor. There are probably some professionals that get away with it reasonably well, but for jerks like us, I’m happy sticking to a diversified portfolio.

Gerry August 14, 2009 at 5:23 am

I’m wondering more about your hedging strategy with the leveraged funds. I’ve been told in the past that holding them for any extended period pretty much locks in losses since the underlying options are steadily losing value. I’d love to see your track record to compare with the advice I’ve been given elsewhere.

elementaryfinance August 14, 2009 at 11:27 am

Hello Gerry

You’re right, over the long term they do lose money due to rebalancing. They are primarily day or short term trading vehicles. I have held them for a few weeks and still profited but I generally like to be out of them within a day or two. Remember that most people cannot “day trade” by definition due to SEC rules so for the average trader to have them, they have to hold them for at least a second trading session or longer if they don’t have a margin account. The idea is to not have 50/50 weight on these. Dollar cost average with buying and selling. While one goes up and you profit, buy the other as it goes down. Please note, when the market is in bull or bear mode (not trading in a profitable range) this strategy does not work. Because of that, I’m not using this strategy currently. Please notice in my article that I didn’t say that I was holding for the long term.

Take care

Tim

Chiko777 August 15, 2009 at 9:00 pm

I love the excitement of timing the market…see for me, investing in the stock market is like a game. It’s suppose to have it’s ups and downs…you can’t win all the time (your not suppose to). It’s fun when you can time the market and make huge gains that average investors don’t make. For example…what other investor can say they have made over 4,000% in the stock market this year so far…..well….still waiting. I turned my $500 investment at the beginning of this year to over $20,000 because of timing the market and I love it. Come join me at Mybarnabas.com where I give stock picks every Monday night of penny stocks that I think will rally for the week (but are also good long-term holds in case they don’t rally).

Chad @ Sentient Money August 18, 2009 at 4:43 am

I am completely sold on market timing big trends and it has worked this entire downturn. The traditional buy and hold/modern portfolio theory works great during the roughly 17 year secular bull market, as anyone can make money when the overall trend is up. However, not anyone can make money in the roughly 17 year secular bear market, which is what we are currently in (slated to end roughly 2016, give or take 2-4 years). No, this isn’t an exact science, but I’m not trying to be dead on with every move. Just correct enough to come out ahead. I don’t make these moves on emotion or gut feeling. I use real numbers. Real numbers that suggest we should be seeing a nice downturn sometime in the next 2 months and it may have started yesterday. We might be out of the Great Recession, but at best we are just in a normal recession right now…not a recovery.

PretendExtend March 6, 2010 at 7:16 am

How will paper investments do when the dollar crashes? Got Physical Gold?

Tyree Cannaday June 19, 2010 at 6:10 am

Stock market trading is very much a crucial part of our world. But can it be too important? It is very much run by two perceptions, fear and greed. If we could invent a whole new machine to power the growth of the world — one without these attitudes — what would it look like?

David August 14, 2010 at 7:43 pm

I agree with your short answer and have a different long answer.

Basically, you can kind of time the market by looking at how much of a deal it is compared to other times. I look at the overall PE of the market and compare it to historical times. 15 is about average. 20 is pretty high. 10 or below almost always gets you really good gains. In March of 2009, it was down to almost 10 and that was a great time to buy.

The Cash Teacher August 15, 2010 at 9:46 pm

I believe there are ways to time the market as well. You have to understand the cyclical workings of this crazy machine.

David August 21, 2010 at 10:17 am

To time or not to time the market? To trade or not trade? Recently, a new home buyer told me he went with a long-term variable rate mortgage. I was surprised with that revelation as mortgage rates are at such an historical low. I would have locked into a long-term at a fixed mortgage rate. To me that is analogous to “buy and hold long term stock position”. Even for a long-term stock investment holding, timing is important because one wants to buy in at the right price (at the right time).

Elliott Wave Trader August 26, 2010 at 3:19 pm

It’s true that if you’re not a full time trader, it can be very hard to learn timing, what strategy to follow, who to listen to for trading advice, etc. It’s still hard as a full time trader and can take years. I use Elliott Wave, which takes years to master but I find it’s the most reliable strategy for predicting the markets.

It does still come down to timing, and only works if you can take the emotion out of your trading. Patience is the key.

Ben The Stock Market Guy August 28, 2010 at 11:42 pm

In my 13 years experience in stock market. Riding the bullish and bearish. I’m convinced that timing the market is the must. “Buy and hold” is obsolete. Why? Because in bearish cycle like in 2002 and 2008, any stock will collapse. Even the best of the best company in the world price will go down! When the fear is rising, no stock can resist the selling pressure. We should remember that in stock market not the logic rules but psychology does. So, if we can time the market and figure out whether it’s going to turn down then we can secure the profit and keep us from losing.

Iyam-Stock Market For Beginners School September 11, 2010 at 1:10 am

I am a professional trader and my experience has been that many beginner traders and investors lose way to much money because of a lack of fundamental stock market education. I think that even if you plan to trade or invest on a part time basis, you should still consider taking stock market investing very seriously.

Timing the market is a skill that is acquired over years of constant trading. Yes, you can never pinpoint a specific date and time that the market will reverse, however, if investors and traders understand technical analysis, they have a far greater chance of spotting trends early.

I cannot with 100% certainty tell you that a stock or market will reverse, however, because I understand technical analysis and Fibonacci, I can tell with 80% accuracy when a stock or market should reverse or stall.

I believe in stock market education. I think that beginner investors should constantly acquire stock market basics and technical analysis education on a regular basis.

The market is simple, we make it hard to understand. In my years of professional trading, I let the market or stock tell me what it’s going to do next. I understand the language the market speaks and I just listen. When you become 1 with the market, the market will give you money, without you having to sweat over it.

Iyam Seva September 30, 2010 at 8:31 pm

Market timing is very important to all business minded people, It is a kind of strategy that a businessman should bear in mind. One cannot produce a product without exact timing, business is like the weather, which has its seasons.

Dr Stoker October 2, 2010 at 6:38 am

If you don’t have time to really watch the markets there are two basic approaches that work in today’s market: (1) use an asset allocation strategy between less than fully correlated sub-markets (e.g., small caps, international, large cap, and dividend stocks) and follow an objective indicator of when the market changes, or (2) employ a stock options straddle that makes money regardless of which a stock moves … as long as it moves. An objective indicator and stock options information are both available at InvestOnlineInfo.com.

JohnMathew October 6, 2010 at 4:38 am

I must say this is a great article i enjoyed reading it keep the good work.

Luigi February 14, 2011 at 7:37 pm

Hey guys, the market fundamental education used for many beginner and professional alike-traders, requires education, learning, strategy and an execution (buy/sell) point. Since timing is not something that we have on our favor, one must consider an entry and an exit point!

Thanks

verpe February 15, 2011 at 8:44 am

How will paper investments do when the dollar crashes? Got Physical Gold?

maschank899 | emt training center August 25, 2011 at 12:24 am

Understanding marketing, investments and business matters and related stuff is one way to get rich. But you must also remember one thing that is actually more important: “your health.” Because how could you do the things that you wish to do if you’re not in good health? So for you to be successful, stay healthy, plus make the effort to become wealthy.

Silicon Valley Blogger August 25, 2011 at 12:46 am

Good points on health being much more valuable than wealth. Take care of your health before you worry too much about money. But then again, if you don’t have money, it can be challenging to maintain good health (in some cases, such as when you have a chronic condition). So it’s a chicken vs the egg type of situation when you’re talking about health and wealth.

Top Stocks September 14, 2011 at 11:16 pm

Thanks……Hopefully I can learn from you true motivation and great soft skills!

Stefan Lombard December 6, 2011 at 2:37 pm

Remember that if you’re a small scale investor, you play by some additional rules that other investors may not have to think about. You may not hear many people talking about this fact, but there are three basic types of investors: small scale investors, institutional investors, and computers. Computers account for 70% of all trades, then institutional investors, and finally, small scale investors. If you want to make money trading in the short or medium term, you have to think like a computer for 70% of the movement and next, you have to think like a professional money manager.

Professional money managers trade millions and often billions of dollars, which means that when they buy or sell, they move the market. When you see stocks move for what appears to be no reason, it may be the work of the institutional managers.

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