Is Buy and Hold Finished? Read What Hulbert Says About Market Timing

By in Advanced Investing, Asset Allocation, Automatic Saving, Bond, Investing, Mutual Funds | 15 comments

Market Timing versus Buy and Hold Investing; The Gloves are Off

Is it wrong to delight in “proof” that my investing practice and writings are correct?

Mark Hulbert, long time author of the Hulbert Financial Digest and Wall Street Journal (WSJ) columnist asked, “Can Market Timers Beat the Index?” in the July 20, 2013 week end edition of the Journal. He answered this frequently attempted practice with raw data!

Market timing-is it a good #investment strategy-or too speculative?

Who is Mark Hulbert?

First, some background on Mark Hulbert. He empiricallly evaluates the trades recommended by 200 prominent newsletter authors. You know who they are, the investment scions who purport to know what holdings to buy and sell and when, in order to beat the market. These investment gurus sell investors their recommendations in published newsletters. Hulbert evaluates their recommendations with back testing and reports who offers the best advice during each period.

In the above referenced WSJ article, Hulbert calls out Bob Brinker’s Market Timer. Brinker successfully counseled his readers when to sell their stock holdings in January, 2000. Those who followed his advice about when to exit and next when to get back in (October, 2002) missed the bear market at the beginning of the century. So you think, this must be the man to watch. Unfortunately, Brinker completely missed predicting the 2007-2009 bear market.

You already see where this is going. It’s not easy to consistently time the market.

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If you are still interested in market timing and want to know which newsletter will bring you riches, ask Mark Hulbert, or better yet, subscribe to the Hulbert Financial Digest.

What is Investment Market Timing?

Market timing is an investment strategy which advocates buying and selling securities based on external signals in an attempt to attain market beating returns. The factors to observe could include technical signals such as the 30 or 90 day moving average of a stock. Fundamental metrics, such as the price earnings ratio (PE) could also be used in market timing. For example, when the PE ratio or Shiller PE surpasses its historical average a market timer might believe that his stock investments are becoming overvalued and decide to sell. On paper, this seems like a decent idea. After all, over time, overvalued stocks do sell off and return to more normal valuations.

True confession, in the past few years, I sold a partial position in a REIT Index fund after doubling in price. Was that market timing a bad decision? Depends, I converted paper profits into realized profits. But, here’s the kicker…. I missed out on additional gains as the REIT I sold continued to go up in value.

The data supports buy and hold investing.

Look at this scenario:

Invest $1.00 in the S & P Index in 1926

In 2003, your dollar is worth $2,285

That’s about 10 percent per year return!

Now try some market timing:

Invest $1.00 in the S & P Index in 1926

Trade out of the market during the 37 months with the best returns – during 1926-2003.

In 2003, your dollar is worth $17.42

Miss the best 37 months during that 77 year period and your return drops to 3.78 percent per year.

Source: Investment: Analysis & Management by Charles P. Jones

Mark Hulbert’s Conclusion on Investment Market Timing

The article concluded that market timers are good at reducing risk. During the previous two market cycles, the 20 best market timers, according to the Hulbert Financial Digest, saved investors 25 percent of the volatility they would have experienced had they remained fully invested in stocks.

Wait, there’s more. Had those same investors simply split their assets 80 percent in stocks and 20 percent in bonds, they would have earned a higher return with the same amount of risk as the market timers. In sum,  market timers have to be right twice; once when they sell and again when they buy back in. That’s a tough practice to perfect.

Hulbert and I both agree, chose a reasonable asset allocation and stick with it. In the long term, you will likely beat the market timers.

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Today, after a couple of years of rising stock prices, everyone looks like an investing genius. Don’t let the next bear market cause you to panic and sell at the bottom.

Have you ever attempted to time the market to goose your returns? Come on, admit it, we won’t tell!

A version of this article was previously published.

    15 Comments

  1. This is simple: If you bought and held the main proponent of buy and hold (Berkshire), how would you have done? And still be doing? It’s amazing that BRK’s performance is so sterling and people almost feel compelled to find reasons not to buy it…

    William Cowie

    August 7, 2013

  2. I can’t remember a time that I was purposely trying to time the market. I’ve had the instance like you where I sold out of something to take the gain to only see it go up more. I HATE that. That said, I agree that having a reasonable asset allocation and being mindful of what’s going on in the market will do you many wonders. That is also assuming that that you’re not stock picking and using the buy and forget mentality.

    John S @ Frugal Rules

    August 7, 2013

  3. @William-I first looked at it when the new shares came out in the early 90’s, and didn’t buy it! I couldn’t believe it could continue. Oh well, my individual picks along with index fund approach performed well too :).
    @John, Selling an seeing something go up is preferable to not selling and watch it decline. I think it’s probably best to take out the emotion, keep a steady asset allocation, and rebalance annually. That’s the way to buy low and sell high!

    Barbara Friedberg

    August 7, 2013

  4. I always felt that I could never time the market and haven’t. I do attempt to make my asset allocation temper the volatility by investing in sectors that are less volatile.

    krantcents

    August 7, 2013

  5. Nice post Barbara, market timing is certainly a fool’s errand. The best strategy in my opinion is to start with a detailed financial plan and invest according to that plan. Rebalance periodically and revisit your financial plan every few years and adjust things as needed. What I just outlined is what I do with my individual investor clients.

  6. I once advocated active management (that’s how I was going around “trading” word) and I was practicing that strategy as well. Not only I lost tons of money it was also very frustrating to me.

    So I changed into a long term dividend investor. Works like a charm!

    But, I still like to time the market. I only use it to enter into a stock position. I watch the stock and as it goes up, it never goes as a straight line. It goes up in a zig-zag move. It goes three steps up, two down and once again, three up, two down. Every uptrend thus creates a higher highs and higher lows. I strive to enter into a stock when it is creating a higher low. If it is in downtrend I buy in lower lows. I do not pick perfect lows but close enough. And then, once I buy, I continue holding for a long time, ideally forever.

    Dividend investing Martin

    August 7, 2013

  7. Good post. I thought I could time the market in the 90s. Of course the 2000-2002 bear market cost me a lot. I found the diehards forum on Morningstar and started to get educated on Jack Bogle’s low-cost passive index strategy. I then moved to Bogleheads.org and learned many more things, such as how to tax loss harvest, put together an investment policy statement, set the correct asset allocation, and now I stay the course no matter what the market does. Like Jack Bogle says, “Don’t do something, just stand there.”

    Bryce

    August 8, 2013

  8. @Krantc-Seems like you have an approach that works for you.
    @Roger, Very nicely put. We adjust our allocation between stock and fixed as well age to reduce the portfolios volatility and protect the capital.
    @Dividend-I have to disagree with you. Some stocks go up a bit and then pull back, but not all. Some stocks went up previously and then head down and don’t go back up; ie NOK (check out the 5 year chart). Personally, after years of stock picking, I’ve moved to index and etf fund investing. Nevertheless, stock study and investing has it’s merits as well. Thanks for stopping by.

    Barbara Friedberg

    August 8, 2013

  9. @Bryce, Thanks for sharing your investing past. I am a proponent of the bogleheads approach. Over time, research shows that passive index investors beat the actively managed mutual funds 60-70% of the time!

    Barbara Friedberg

    August 8, 2013

  10. After having lost 40% of my savings during 2001 to 2003, I started with long-term market timing, using trend signals. No gut feeling. Just objective, excessive back-tested, mathematical signals that tell when to buy and when to sell broad market index funds. I’ll never go back. Peace of mind and returns that are in the long run better than the market index.

    Van Beek

    August 9, 2013

  11. I thought I was an investing genius in the late 90’s. Almost lost it all and my mind in the process. Dabbling with stocks on a small scale and I always end up losing money because I couldn’t control my emotions. I’m using retirement target year funds now. So far so good for now.

    Buck Inspire

    August 20, 2013

  12. @Buck Inspire, In principle, I like target funds. You can pretty much set ’em and forget ’em. There are a few things I don’t like about them: Their cost is higher than a 3-fund equivalent fund using Vanguard; They may not be as conservative as they should be for their target date; They may hold expensive actively-managed funds. I wrote about this in How Are Target Date Funds Put Together and Can We Do Better?

    Bryce @ Save and Conquer

    August 20, 2013

  13. @Van Beek, Glad you found a way to invest that works for you. Personally, I support a fundamental investing approach.
    @Buck-Target date funds are not without their deficiencies as BRyce (commentor below you) mentioned, but in generaly it’s hard to beat the set it and forget it approach available with target date funds. We have such a propensity for mental financial errors and the target date funds take the psyche out of the equation.
    @Bryce-Thanks for adding some color on Target Date funds!

    Barbara Friedberg

    August 22, 2013

  14. Tortoise, Too much effort for potential reward trying to time the markets 🙂

    Barbara Friedberg

    July 24, 2015

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