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

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

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.