I had a visitor the other day that asked the straightforward question, “What do you think about market timing?” It’s a good question, one that every investor should ask of a prospective adviser or money manager.
I’ve been plying my trade for 20 years now. Over the course of those years, there are some standard statements that we are all trained to parrot. They are so engrained into our habits that the answers are automatic. Answers like, always invest for the long term. And, be patient, it all works out in the end. And, market timing doesn’t work.
The standard blurb about market timing states that not only does market timing not work, but that it is an abhorrent and evil practice. Whenever an investor asks me what I think about market timing, they ask because they know the answer I am supposed to give, and they just want to hear me say it.
But, I don’t say it anymore.
The question of market timing is not that simple. When we get right down to it, all investment decisions are timing decisions.
Let’s take the extreme example of a long-term, index investing purist, somebody that reads all of John Bogle’s books. This investor does not believe in timing the market, nor does he believe that one can analyze individual stocks and make decisions about when to buy or sell them. Upon coming up with a sum of money, he plops it all down on some index fund shares.
The timing aspects of this investor’s decisions will be the primary determinants of his returns over time. One, he decides to buy stocks now, not tomorrow or next month, now. That is a timing decision if I ever saw one.
He decides to allow the people at Standard & Poor’s to make decisions about when to add or subtract stocks from his index fund. Those are timing decisions. He makes a continuing decision to keep his stocks, rather than sell them and buy bonds or other investments.
A decision to not sell is a timing decision.
We can also examine the habits of a different type of investor, one who believes in the process of performing fundamental valuation analysis and buying under-valued stocks. This investor is a disciple of Warren Buffet.
Surely, Buffet is not a market timer? Oh, yes, he most certainly is.
When Buffet made his now-famous purchases of Coca Cola, Gillette and American Express, those were timing decisions. He decided that the stocks were cheap at a moment in time, and that the time was right to buy them.
Timing matters, and it matters a lot.
Recently, Buffet made the disclosure that he has made large bets against the dollar. That is a timing decision. While the decision is grounded in his considerable analysis skills, he eventually has to decide when to pull the trigger.
The fact of the matter is that we are all market timers. We decide to time the whole market or individual stocks or bonds or even our home mortgage refinancing.
I make a clear distinction among styles of market timing. Timing decisions differ according to the thought process that leads to them. Some investors - traders, really - attempt to make very short-term decisions that involve little or no fundamental analysis. They attempt to profit by making buys and sells at exact turning points in price movements.
This sort of market timing is what we think of when we hear the term. I would agree with most of you that this sort of activity has no role in a wealth management program.
Another form of timing has, in my view, great merit. Commonly called tactical allocation, it involves a decision to shift money among various asset classes according to the manager’s judgments about risk and return and valuation. While clearly the manager expects prices to go a certain direction, there is little attempt to make perfect timing decisions.
If we extend our review of investing history back over many decades and pick out the long-term winning total return managers, we find that this form of tactical allocation has produced the most consistent growth of wealth of any given investment style. Market timing works, in this context.
Both growth and value investing involve timing. Choosing between short- and long-term bonds is a timing decision. Buy gold or hold cash? It’s a timing decision.
We have to make decisions, and we have to decide when to make them. Everywhere we look, we find that timing dominates our investment results. I encourage investors to accept the fact that they will be making timing decisions.
They should focus their efforts on developing an analytical process for making good timing decisions, rather than continue the fiction that they are not market timers.
Rick Ashburn manages investments for private clients. Write to him at firstname.lastname@example.org or 7777 Fay Ave., Suite 230, La Jolla, 92037.