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Further evidence that market timing is both a bad idea and impossible – we receive no warnings ahead of time and the media is nearly 100% unreliable as a source for level-headed analysis. It’s also a great look at why Wall Street loves to keep your money moving.
So why is eliminating market timing as a strategy so hard to do?
And while the first is easy to explain and understand, the second is more complicated.
First, the industry benefits when investors make moves and transitions. Transactions cost money, sometimes in two or three different ways: commissions, trading volume incentives, and other fees, not to mention the tax bill that sometimes results. And because trading is so lucrative for investment firms, they are motivated to set things up so that investors are prone to do it, and do it often. It’s a fact of the business. Know this, and stay away from it.
The second reason, which is predicated on the first, is that investors are often exposed to many layers in the investment system, all of which can hide market-timing behavior.
Here are four such layers. There are likely more.
The investors themselves. That’s you. You have the ultimate ability to buy and sell when you want to. It’s your money. The problem that investors pose to themselves is that because it’s their money and their future, emotions, perceptions and instincts nearly always make it impossible for them to successfully manage their own money well. So they find an advisor. And that takes us to layer number 2.
Investors choose to work with financial or investment advisors who guide them toward investment products. These advisors have a set of motivations and beliefs all their own. Does the advisor market time with her own money? Will she have the inner fortitude to advise you to stay disciplined even if faced with the possibility that you might fire her?
Then again, investors don’t always get to choose their advisors. For 401k and other types of work-based plans there is also the layer of the plan provider. This is the investor’s employer. The employer makes decisions about who to use for investments and which investments will be available within that plan. You the investor are then subject to your employer’s investment choices.
Similarly, on the mutual-fund level, managers are involved in making decisions about the buying and selling that goes on inside mutual funds. Sometimes, as with target-dated retirement funds, there are often two layers (fund of funds platforms). This adds yet another manager, or set of managers who make buy-and-sell decisions about stocks or entire mutual funds.
It’s easy on the one hand to say I don’t want to be a market-timing investor. But it’s altogether another thing to get market timing fully out of your investing system.
That said, it is normally possible, with the right information and ongoing coaching, to alleviate your portfolio of all or most of the destructive practice of market timing. With consistent coaching and education, investors can avoid it.
But market timing is like poison ivy. It has a tendency to creep back in. You need to be about the business of killing it regularly.
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The Definition: Market timing involves any change made to the mix of the assets in a portfolio based on any kind of prediction about the future.
And NO, you shouldn’t be doing it. Market timing with investments is always a bad idea. No one can predict the future. Anyone who appears to have done this in the past may have indeed gotten one right, they may have even done that in a very complex and educated way, but still, they simply got one right. They may even get a few right, but the likelihood of an advisor, or a fund manager getting it right for a period of time long enough to actually benefit an investor is impossible.
The mutual fund manager who beat the market the longest was Peter Lynch. He managed a Fidelity fund called Magellan. From 1979 through 1992, Lync’s complex market-timing strategy worked to best the market 11 out of those 13 years! Amazing. No one had ever done that before. And no one’s done it since. This was a verifiable five-star performance that beat all competitors. Today, 22 years later, Peter Lynch is still a household name as a result.
But who benefited? When did all that money come in?
Few had even heard of Peter Lynch until the mid 80s. So, the lion’s share of the money entered the fund well after the best years were behind him. Those who got in late were all hopped up on the “unspoken promise” of winning results. When those results began to fade a few years later, many got out. Those who held on through the 90s underperformed the market index on average for that entire decade and until now.
So no, I don’t believe it’s a good idea for investors to utilize this strategy in their portfolios. Investors should avoid any kind of advisor or product that makes any kind of market-timing, prediction-based decisions. Simple, right?
Simple maybe, but not easy. Tune in on Friday for the layered reasons why.