MONEYSENSE 06.24

Time IN Versus Time ING

By Ray DiBartolomeo

Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.^[1]

This is an investment strategy based on the outlook for an aggregate market rather than for a particular financial asset. The efficient-market hypothesis is an assumption that asset prices reflect all available information, meaning that it is theoretically impossible to systematically “beat the market.” Market timing can cause poor performance. After fees, the average “trend follower” does not show skills or abilities compared to benchmarks. “Trend Tracker” reported returns are distorted by survivor bias, selection bias, and fill bias.^[2]

Time IN

Mutual fund flows generally track the overall level of the market: investors buy stocks when prices are high, and sell stocks when prices are low. For example, in the beginning of the 2000s, the largest inflows to stock mutual funds were in early 2000 while the largest outflows were in mid-2002. These mutual fund flows were near the start of a significant bear (downtrending) market and bull (uptrending) market respectively. A similar pattern is repeated near the end of the decade.^{[3][4][5][6][7]}

This mutual fund flow data seems to indicate that most investors (despite what they may say) actually follow a buy-high, sell-low strategy.^[8][9] Studies confirm that the general tendency of investors is to buy after a stock or mutual fund price has increased. This surge in the number of buyers may then drive the price even higher.^[10]

Time ING

Whether market timing is ever a viable investment strategy is controversial. Some may consider market timing to be a form of gambling based on pure chance, because they do not believe in undervalued or overvalued markets. The efficient-market hypothesis claims that financial prices always exhibit random walk behavior and thus cannot be predicted with consistency.^[11][12]

Some consider market timing to be sensible in certain situations, such as an apparent bubble. However, because the economy is a complex system that contains many factors, even at times of significant market optimism or pessimism, it remains difficult, if not impossible, to predetermine the local maximum or minimum of future prices with any precision; a so-called bubble can last for many years before prices collapse. Likewise, a crash can persist for extended periods; stocks that appear to be “cheap” at a glance, can often become much cheaper afterwards, before then either rebounding at some time in the future or heading toward bankruptcy.^[13][14]

Proponents of market timing counter that market timing is just another name for trading. They argue that “attempting to predict future market price movements” is what all traders do, regardless of whether they trade individual stocks or collections of stocks, aka, mutual funds. Thus, if market timing is not a viable investment strategy, the proponents say, then neither is any of the trading on the various stock exchanges. Those who disagree with this view usually advocate a buy-and-hold strategy with periodic “re-balancing”.^[15][16]

At Ironcrest Capital Management, we strive to make sure that everyone we work with has a strong understanding of their investments. Having a good approach and focus on the most important factors before investing is key. Our goal is to help you make the right decisions. If your current investing approach isn’t working, reach out to us so we can help.