Fisher Investments Editorial Staff
Forecasting, Market Risks

Time and Again

By, 11/17/2009
 

Story Highlights:

  • Following the bear market, more mutual funds are offering "market timing" strategies.
  • Unfortunately, successfully picking precise, or even near-precise, entry and exit points repeatedly over time has proven near impossible.
  • Combined with more transaction costs tied to higher trade frequency, investors' net returns over time in a market timing strategy could be lower than index returns.
  • Calling a bear market and moving to cash is a prudent move if correct, but trying to time market corrections can be costlier than just riding them out.
  • Ultimately, it's not imperative to call all the bears if you want to capture stocks' long-term average returns.

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Like the Fountain of Youth and Holy Grail before it, market timing has proved to be an object of Arthurian proportions. The pursuit of successful short-term market timing—buying and selling stocks at precise moments to avoid losses and reap only returns—is a quest defined not by glory but vainglory. Yet, following the bear market, more mutual funds are suiting up for the endeavor.

Because market timing to capture short-term swings hasn't been completely disproven (just like the Fountain of Youth and Holy Grail, or the Leprechaun's pot of gold), no amount of brainpower, money, or reputation has been spared trying to divine it. Today's mutual funds offer varied market timing strategies. Some rely on technical indicators, others rely on macroeconomic factors, stock-picking, valuations, etc. But often it's still the individual trader or mutual fund manager that makes the decision to leave or enter the market and to what degree.

Unfortunately, successfully picking precise, or even near-precise, entry and exit points repeatedly over time has proven near impossible—or at least historically, no one's done it successfully with any consistency. After all, a human brain is prone to all sorts of cognitive errors and biases when it comes to investing. A study by DALBAR, Inc. showed over the last 20 years, mutual fund investors lagged the S&P 500 by 6.5% on average annually due to poor timing decisions. Couple that with paying more transaction costs tied to higher trade frequency, and investors' net returns over time are likely to be lower than index returns—perhaps vastly so 

Remember, stocks' 9.4% long-term average annual performance is inclusive of bulls and bears, corrections and rallies. Calling a bear market and moving to cash is a prudent move if correct, but trying to time market corrections—short-term declines of 10% to 20% or more over the space of a few weeks to a few months—can be costlier than just riding them out. Corrections are normal during bull markets and don't disrupt the overall upward trend. Even if investors do not call every bear, missing large parts of a few bears and otherwise remaining market-like can provide big, compounded outperformance over the long haul. 

It's not surprising there's heightened interest in "market timing funds" today. Following the bear market, the siren call of side-stepping losses is tempting. But market timing is associated with higher risk, not lower. Every time investors leave the market, they must worry about when to get back in. Time it too late, and miss out on returns.  

Ultimately, it's not imperative to call all the bears if you want to capture stocks' long-term average returns—which, despite the recent bear market, are still higher than comparable asset classes. There are many worthy pursuits in life, but time and again, market timing proves not to be one of them.

 

 

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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