The Two Phases of Market Timing

I would love to accurately claim to be a successful market timer but I can’t. I haven’t even tried. My view is that successful market timers are more lucky than good.

I have made asset allocation moves in recent years based on a combination of (a) current economic conditions and (b) consensus expectations for how those conditions are likely to change in the near term. Given the conditions that arose in 2008 and which remain substantially unchanged today, finding negativity in the markets is not rocket science.  I don’t buy and sell based on hunches, guesses, or gambles.

The more I read and study investing, the more convinced I become that I will never “know” enough to successfully time the markets. Market timing is more complex than many folks anticipate because they don’t appreciate that there are two separate phases to consider. If your primary goal is to avoid significant losses, the first phase – getting out – is the easiest. When bad news arrives to the markets (a war, a housing bubble collapse, etc.), the market starts down and shortly thereafter you get out. No big deal. You may have avoided some of the market losses.

Now comes the second phase – getting back in. The ideal move is to get in when the market bottoms and buy stocks on the cheap. But who knows when that is? I sure don’t. If you say you do, you are probably fooling yourself.

There are no geniuses or supercomputer investment systems that can reliably and accurately determine a market bottom. If there were, everyone would follow that genius or system. What happens then? A distortion of the market by the system itself. We experience systemic market distortions today as a result of high speed, high volume trading systems.

This is a recurring theme. A recent article published at CNN/Money featured this question from a baby boomer:

I’m 57 and I’ve been pretty good at dodging big market downturns over the years. But knowing when to get back into the market is much more difficult. I shifted half of my $700,000 portfolio to cash in May 2011 and then moved the rest to cash in May of this year. I still think the risk-reward balance in investing is totally out of whack, but I’m unsure whether to remain in cash or get back into the market. What’s your advice?

A smart aleck response to this question would be this: Sir, just stay out the market permanently. You can then boast that you dodged all of the market downturns.

I won’t be a wise guy because this is a legitimate concern. I just think this gentlemen is asking the wrong question. Rather than being concerned about catching market waves at the right time, he should get focused on the real goal or end game.  He should be asking how he can position his portfolio to support a reasonable baseline lifestyle when he retires. He may discover that market timing doesn’t need to be part of the plan. Indeed, he may discover that the market isn’t the place to be at all, at least not with all of his nest egg.

The answer given to the writer’s question is reasonable. This retirement investor should be more concerned with (a) asset allocation and (b) re-balancing. Moving in and out of cash is a fool’s game. If you are able to provide an income to meet basic retirement needs with part of your portfolio, you can market time with the rest. Have at it.


  1. says

    I read and hear the opinions on ” market timing” constantly. My view is that it needs to be somewhat mechanical. I have used the 12 month moving average , on monthly data of the S&P 500 , since 1998 it’s much cleaner than either the DOW or NASDAQ.
    Have I every lost on or been whipsawed on these trades … yes. But over time this method has avoided huge losses and picked up much of the upside . It becomes more difficult (emotionally)over time as portfolio size increases and works best with a smaller number of names and in a non-taxable account.

    • MJP says

      Randy: This approach appears similar to setting targets for buy/sell moves and then actually buying or selling based on those targets. Can you explain more about when you buy or sell based on a 12 month moving average? Or is that part not as mechanical?

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