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.
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.
FREE UPDATES: If you enjoy what you read here, please consider subscribing to receive free updates automatically by RSS feed or by email. (I promise that your email address will not be shared or used for any other purpose.)