What is market timing and is it a viable investment strategy?
Market timing is using a set of indicators, most often based on price charts, market breadth
(amount of stocks rising as a percentage of all the stocks) and sentiment polls, to determine
the likely direction of the market in the medium- to- long term and to make buy and sell
decisions accordingly. The objective of market timing in its strict sense is to be fully
invested during a rising market and in a 100 % cash position when the market starts
falling. Needless to say market timing is an extremely difficult endeavour that can lead to
frustration. Many market timers not satisfied with simply exiting the market in a downtrend
short the indexes using ETF's or short funds for example. At Buy Point, we think shorting
the stockmarket except as a hedge in special market circumstances such as the October
08 crash (which we did) is simply not worth the risk nor the trouble for the individual
investor.
The stockmarket has an upward bias because of its very nature (and as we have seen
recently because of government intervention) and stocks rise about 70% of the time.
Even during the October 08 crash, arguably the biggest of all time and the vindication
bears had bet on unsuccesfully for years , many shorts were taken out just before the
plunge following government interference with the markets. Buy Point will show agressive
investors other ways to profit from a decline with less risk.
Buy Point will use market timing techniques to decide when to increase or decrease
exposure to either equities or bonds and cash and will also use technical analysis to issue to
more active clients short-term BUY and SELL signals on US sector ETF's, gold and US
treasury bonds. Buy Point will also occasionally issue BUY signals based on technical
analysis of carefully selected stocks for high capital appreciation.
This means you should not make all-or-none bets on equities or bonds using the market
timing signals Buy Point issues even though these signals have been reliable in the past
(click here to read about the signals issued in the past 18 months) . Market timing in its
strict sense is not suited to most investors and has been shown to underperform
stockmarket indices over the very long run. You have probably seen many investment
newsletters claiming to beat the market over long periods of time, on paper, with market
timing. The reality is that most, if not all, professional money managers using market
timing (switching between equities and cash depending on one's outlook for the market)
underperform long term buy-and-hold returns. These are sophisticated people watching
and analyzing the market every day with millions under management. Needless to say, the
average investor at home with limited time to follow the market and act quickly, and very
often susceptible to let emotions and lack of discipline affect his decisions, will most
probably obtain very disappointing results by switching his portfolio between a 100%
equity position and a 100% cash position.
Because consistently timing the market with great accuracy is impossible over the very
long run, one should always hold a diversified portfolio with some exposure to stocks, cash
and bonds depending on their age, risk profile and the level of interest rates. Timing should
generally be used to increase or decrease exposure, to make additional investments in the
market, rebalance a portfolio or to attempt to participate in the market with funds that will
be needed in the short- to -medium term. In the latter case, the investor will need a
rigourous discipline to cut losses short when the market moves against him/her.
Market timing is using a set of indicators, most often based on price charts, market breadth
(amount of stocks rising as a percentage of all the stocks) and sentiment polls, to determine
the likely direction of the market in the medium- to- long term and to make buy and sell
decisions accordingly. The objective of market timing in its strict sense is to be fully
invested during a rising market and in a 100 % cash position when the market starts
falling. Needless to say market timing is an extremely difficult endeavour that can lead to
frustration. Many market timers not satisfied with simply exiting the market in a downtrend
short the indexes using ETF's or short funds for example. At Buy Point, we think shorting
the stockmarket except as a hedge in special market circumstances such as the October
08 crash (which we did) is simply not worth the risk nor the trouble for the individual
investor.
The stockmarket has an upward bias because of its very nature (and as we have seen
recently because of government intervention) and stocks rise about 70% of the time.
Even during the October 08 crash, arguably the biggest of all time and the vindication
bears had bet on unsuccesfully for years , many shorts were taken out just before the
plunge following government interference with the markets. Buy Point will show agressive
investors other ways to profit from a decline with less risk.
Buy Point will use market timing techniques to decide when to increase or decrease
exposure to either equities or bonds and cash and will also use technical analysis to issue to
more active clients short-term BUY and SELL signals on US sector ETF's, gold and US
treasury bonds. Buy Point will also occasionally issue BUY signals based on technical
analysis of carefully selected stocks for high capital appreciation.
This means you should not make all-or-none bets on equities or bonds using the market
timing signals Buy Point issues even though these signals have been reliable in the past
(click here to read about the signals issued in the past 18 months) . Market timing in its
strict sense is not suited to most investors and has been shown to underperform
stockmarket indices over the very long run. You have probably seen many investment
newsletters claiming to beat the market over long periods of time, on paper, with market
timing. The reality is that most, if not all, professional money managers using market
timing (switching between equities and cash depending on one's outlook for the market)
underperform long term buy-and-hold returns. These are sophisticated people watching
and analyzing the market every day with millions under management. Needless to say, the
average investor at home with limited time to follow the market and act quickly, and very
often susceptible to let emotions and lack of discipline affect his decisions, will most
probably obtain very disappointing results by switching his portfolio between a 100%
equity position and a 100% cash position.
Because consistently timing the market with great accuracy is impossible over the very
long run, one should always hold a diversified portfolio with some exposure to stocks, cash
and bonds depending on their age, risk profile and the level of interest rates. Timing should
generally be used to increase or decrease exposure, to make additional investments in the
market, rebalance a portfolio or to attempt to participate in the market with funds that will
be needed in the short- to -medium term. In the latter case, the investor will need a
rigourous discipline to cut losses short when the market moves against him/her.
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