MARKET TIMING and the business of killing it

So why is eliminating market timing as a strategy so hard to do?

Two reasons.

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.

  1. 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.

  1. 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?

  1. 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.

  1. 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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