Market Timing Is Back—and That’s Bad

06/25/2007 12:00 am EST


Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

Tom Slee, contributing editor to Internet Wealth Builder, says investors appear to be embracing market timing, which he views as a loser's game.

Now four years old, this bull market sure has legs. Toronto's S&P/TSX surged almost 28% during the last 12 months, while the Dow Jones Industrial Average jumped 25% [before the recent pullback].

Is there still upside, or are we on the edge of a precipice? The debate is shifting from fundamental values to market timing. That's dangerous! 

[Market timing] is a tempting concept and increasingly popular amongst even somber buy-and-hold investors during prolonged bull or bear markets. After a long advance and often against their better judgment, people jump in to make what seems to be easy money. Conversely, during an extended decline they cannot bear the pain of increasing losses and bail out at the worst possible time.

Emotion and hindsight, always dangerous in the stock market, override common sense and fundamentals. The truth is that market timing involves gauging investor sentiment, an almost impossible task.

[Yet] market timing is a booming business. For instance, the Hulbert Financial Digest keeps track of 170 market-timing newsletters. The bad news, according to publisher Mark Hulbert, is that roughly 80% of them underperform the market indexes. Even worse, Mr. Hulbert has observed a pattern of investors losing their nerve and suffering even greater losses when they bail out of the timing strategies. 

The point is that market timing is a quicksand. The professionals have tried it and failed. A spokesperson for Fidelity Investments admits: "For the most part it's something you can't get right". Various studies have shown that attempts by pension funds and mutual fund investors to time markets actually reduced rather than improved returns.

One reason, I suspect, apart from misleading indicators, is that timing requires an astonishing amount of focus and attention. The idea that stocks are always going up and down with astute, nimble traders jumping in and out, is a fallacy; most of the time the market is boring. Significant gains and losses occur in brief, unpredictable bursts.

A study by Cambridge Associates showed that the Standard & Poor's 500 provided a compound return of 18% from 1982 to 1990. But if you missed the best 20 days, your return would have fallen to 8%, not a lot more than bonds were offering during that period. You can see how much discipline, and probably luck, a market timer would have needed to outperform any buy-and-hold investor during those eight years.

All of this, I suggest, means that of course there is still time to climb aboard the train, but not because we are in a bull market. Just stick with your basic investment strategy and keep making long-term, top-quality investments. By buying and holding you enjoy the upward bias in North American markets as the Canadian and American economies grow.

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