The Verdict on Market Timing

The Verdict on Market Timing

Many professional investors move money from cash to equities or to long-term bonds based on their forecasts of fundamental economic conditions. Indeed, several institutional investors now sell their services as “asset allocators” or “market timers.” The words of John Bogle, chairman of the Vanguard Group of Investment Companies, are closest to my views on the subject of market timing. Boggle said: “In thirty years in this business, I do not know anybody who has done it successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently. Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive.”

Bogle’s point may be very well illustrated by an examination of the different charts showing the percentage of total assets held in cash of all equity managers funds from 1970 to 1989. They show that mutual-fund managers have been incorrect in their allocation of assets into cash in essentially every market cycle during the seventies and eighties. Note that caution on the part of mutual-fund managers coincides almost perfectly with trough in the market. Peaks in mutual funds’ cash positions have coincided with market trough during 1970, 1974, 1982, and the end of 1987 after the great stock-market crash. Conversely, the allocation to cash of mutual-fund managers was almost invariably at a low during peak periods in the market. Clearly the ability of mutual-fund managers to time the market has been egregiously poor.

Obviously being “out of the stock market” during a period of sharp decline, such as October 1987, would have saved you a lot of grief and money. We all hear of those “astute” few who “knew” the market was too high in early October and sold out. But unless those timers got back into the market right after the lows were hit, they were not more successful than investors who followed a “buy-and-hold” strategy. And the facts suggest that successful market timing is extraordinarily difficult to achieve.

Sergeant Ryan Russel parkette, Toronto. Photo by Elena

Remember, over the past forty years the market has risen in twenty-six years, been even in three years, and declined in only eleven. Thus, the odds of being successful when you are in academic study by Professors Richard Woodward and Jess Chua of the University of Calgary shows that holding on to timing because your gains from being in stocks during bull markets far outweigh the losses in bear markets. The professors conclude that a market timer would have to make correct decisions 70 percent of the time to outperform a buy-and-hold investor. I’ve never met anyone who can bat .700 in calling market turns.

Another example of the difficulty of market timing is provided by two covers from Business Week, one of the most respected business periodicals. On August 13, 1979, when the S&P Index stood at 105, Business Week ran a cover story on the “The Death of Equities,” and on May 9, 1983, after a 60 percent rise in the market, they ran another cover story, “The Rebirth of Equities.” The economist and highly successful and highly successful investor John Maynard Keynes rendered the appropriate verdict more than fifty years ago:

We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares as a whole at different phases of the trade cycle… As a result of these experiences I am clear that the idea of wholesale shifts is for various reasons impracticable and indeed undesirable.

Most of those who attempt it sell too late and buy too late, and do both too often, incurring heavy expenses and developing too unsettled and speculative a state of mind, which, if it is widespread, has besides the grave social disadvantage of aggravating the scales of the fluctuations.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.