What is Market Timing?
Everyone practices market timing in some form whether they realize it or not. Some do it as part of a strategic plan to preserve capital or out perform the market. While others time the market without realizing it. The latter group’s timing is dictated by chance, convenience and other random events that impact their lives.
“Random Timers” sincerely believe that they are not market timers. They may claim to be long-term investors who are well diversified. But the fact is, normally, you don’t receive one lump sum of money at, say, age twenty, to invest and forget. Much of your investment timing is determined by outside influences. This de-facto timing-of-sorts is based upon when you receive income or funds. For example, you may invest biweekly (randomly) due to pay periods to your 401k plans (24 data points a year) or your “timing” may be determined by a rich relative who passes their estate along to you to be invested. You may get fired from your job and temporary postpone investments all together. You could receive an unexpected tax refund, win the lottery, get a year-end bonus, have a family emergency, have a legal windfall or penalty, etc. Asset reallocation is a form of timing the market (one asset class to another) in a macro sense.
Or perhaps you don’t time the market -- you let your financial professional do it for you. They determine your market exposure and “time” when you are more or less heavily invested in stocks.
If timing is irrelevant, then what’s all the fuss?
According to many academic theories, in the long run, timing is irrelevant. Funds relying on vast diversification and duration should outperform market timers. Yet, today, news headlines are filled with reports of hedge fund operators reaping extraordinary profits from “market timing” mutual funds. How do we reconcile these two opposing views? Are excess profits earned from exploiting mutual fund fees; global arbitrage created by differences in settlements, taxes; or front running the mutual fund customer? There are many flaws in the current design of mutual funds. One glaring problem is that many are tradable (by most investors) only at one time during the day – 4:00! The flaw becomes especially problematic – and was apparently exploited by some hedge funds -- when the assets underlying the Mutual Fund or news that affects underlying asset values differ from the daily 4:00 price of the mutual fund.
Many solutions exist – Exchange Traded Funds (ETF’s) that benchmark index performance over a period of years and closed end funds that are tradable throughout the day, not only at 4:00, are two simple solutions. Would investors be aware of these nuances if they read the fund prospectus? But that’s another issue concerning doing the right thing and personal responsibility.
Varying degrees of Market Timing
Professionals have always timed the market. The stop-loss order and many technical analyst methods are forms of market timing. If you really think about it and you are indexed or diversified across all sectors to capture the general trend of all the markets. Financial news and company fundamentals mean nothing. You are all ready fully invested and you plan has already taken into account some investments will fail. You are on autopilot until your plan has come to conclusion or you deem it has failed.
One key to successful market timing is flexibility. The recognition that you’ve made a mistake and can change your investment plan is an essential ingredient. The goal of market timing is to limit losses. In the long run the real key to wealth building is a percentage gain of a very large number not a small one. There are different levels of market timing based on types and subtypes of invest vehicles but many confuse market timing with larger than normal returns -- a risk management subject.
An individual’s asset allocation will change during their lifetime. Factors such as age, economic, income level, situational factors and other risk determinants will affect asset allocation. Asset allocation isn’t static -- the process is continually changing. At some stage, the execution of the plan becomes a timing issue. The micro level, the level at which the strategic plan is implemented, entails market timing, almost by definition.
Framing the discussion
Discussions surrounding the topic of Market Timing seem to depend, in large part, on the advocate’s or adversary’s point-of-view. The technical analyst may indicate that Market Timing is a critical part of portfolio strategy whereas the fundamental analyst and academician will discount its importance. Current headline writers may attempt to sensationalize the term and expand it’s meaning.
So … what is market timing?
At the rudimentary level it’s nothing more than the point in time at which we buy or sell stocks. There are many factors -- technical, fundamental, managing risk, portfolio models, investor utility, market or price levels, and more -- that impact this point in time. Regardless of whether you want to acknowledge the fact or not, if you’re involved in the equities markets, you’re involved in some form of market timing.
“Random Timers” sincerely believe that they are not market timers. They may claim to be long-term investors who are well diversified. But the fact is, normally, you don’t receive one lump sum of money at, say, age twenty, to invest and forget. Much of your investment timing is determined by outside influences. This de-facto timing-of-sorts is based upon when you receive income or funds. For example, you may invest biweekly (randomly) due to pay periods to your 401k plans (24 data points a year) or your “timing” may be determined by a rich relative who passes their estate along to you to be invested. You may get fired from your job and temporary postpone investments all together. You could receive an unexpected tax refund, win the lottery, get a year-end bonus, have a family emergency, have a legal windfall or penalty, etc. Asset reallocation is a form of timing the market (one asset class to another) in a macro sense.
Or perhaps you don’t time the market -- you let your financial professional do it for you. They determine your market exposure and “time” when you are more or less heavily invested in stocks.
If timing is irrelevant, then what’s all the fuss?
According to many academic theories, in the long run, timing is irrelevant. Funds relying on vast diversification and duration should outperform market timers. Yet, today, news headlines are filled with reports of hedge fund operators reaping extraordinary profits from “market timing” mutual funds. How do we reconcile these two opposing views? Are excess profits earned from exploiting mutual fund fees; global arbitrage created by differences in settlements, taxes; or front running the mutual fund customer? There are many flaws in the current design of mutual funds. One glaring problem is that many are tradable (by most investors) only at one time during the day – 4:00! The flaw becomes especially problematic – and was apparently exploited by some hedge funds -- when the assets underlying the Mutual Fund or news that affects underlying asset values differ from the daily 4:00 price of the mutual fund.
Many solutions exist – Exchange Traded Funds (ETF’s) that benchmark index performance over a period of years and closed end funds that are tradable throughout the day, not only at 4:00, are two simple solutions. Would investors be aware of these nuances if they read the fund prospectus? But that’s another issue concerning doing the right thing and personal responsibility.
Varying degrees of Market Timing
Professionals have always timed the market. The stop-loss order and many technical analyst methods are forms of market timing. If you really think about it and you are indexed or diversified across all sectors to capture the general trend of all the markets. Financial news and company fundamentals mean nothing. You are all ready fully invested and you plan has already taken into account some investments will fail. You are on autopilot until your plan has come to conclusion or you deem it has failed.
One key to successful market timing is flexibility. The recognition that you’ve made a mistake and can change your investment plan is an essential ingredient. The goal of market timing is to limit losses. In the long run the real key to wealth building is a percentage gain of a very large number not a small one. There are different levels of market timing based on types and subtypes of invest vehicles but many confuse market timing with larger than normal returns -- a risk management subject.
An individual’s asset allocation will change during their lifetime. Factors such as age, economic, income level, situational factors and other risk determinants will affect asset allocation. Asset allocation isn’t static -- the process is continually changing. At some stage, the execution of the plan becomes a timing issue. The micro level, the level at which the strategic plan is implemented, entails market timing, almost by definition.
Framing the discussion
Discussions surrounding the topic of Market Timing seem to depend, in large part, on the advocate’s or adversary’s point-of-view. The technical analyst may indicate that Market Timing is a critical part of portfolio strategy whereas the fundamental analyst and academician will discount its importance. Current headline writers may attempt to sensationalize the term and expand it’s meaning.
So … what is market timing?
At the rudimentary level it’s nothing more than the point in time at which we buy or sell stocks. There are many factors -- technical, fundamental, managing risk, portfolio models, investor utility, market or price levels, and more -- that impact this point in time. Regardless of whether you want to acknowledge the fact or not, if you’re involved in the equities markets, you’re involved in some form of market timing.
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