Are You A Secret Market-Timer?

Here’s something that you might not know. You might be a market-timer, even though you may not be aware of it.

Market-timing gets a bad rap in the investment community. Most experts say that it’s nearly impossible to improve your results by jumping into and out of the market. Sure, anyone can get lucky and guess right 2 or 3 times in a row, but soon the law of averages will catch up and when it does, Mr. Market will take back everything you made and then some. And the experts are right about that.

Most people I know, even the ones who self-identify as buy-and-hold investors, are secret market timers. They believe that they’re following a buy-and-hold strategy, but the record shows that nearly everyone times the market. They just differ in their frequency.

The thing that makes market timing so hard to pull off with any consistency is that each “event” requires two correct decisions – the sell to get out, and the subsequent buy to get back in. If you sell today, and the market goes down for a while, you might think that you were successful. But you won’t know whether or not you’re successful until you make the second decision, and buy back in. You would have to get back in at a lower price in order to be successful on the timing event. I’ve seen countless examples with my own clients and business associates, where they are successful with the first part of this trade, but they wait too long to get back in. By the time they do, the market is higher than it was when they got out, and it ends up costing them money. In some cases, a lot of money.

I read a study a couple of years ago that calculated the odds of successfully timing the market over any 20 year stretch of time. The odds of doing it correctly one time is 22.75%. Twice in a row? 5.17%. Three times? 1.18%. Obviously the odds get even worse from there, but you get the point. From a purely mathematical perspective, the odds of improving your returns by timing the market are terrible.

But wait a second, you say. I’m not trying to improve my returns, I’m just trying to protect myself from a big market crash. It’s peace of mind I’m after, not profits. Selling today and buying back some time in the future is like taking out an insurance policy to me. So take that, you statistical Troll!

My answer to this argument may surprise you. I think it’s completely valid. If your stated purpose is to avoid the possibility of getting mauled by a nasty bear market, then by all means go ahead and time the market. If you look at it as an insurance policy against financial disaster, that’s cool. But insurance doesn’t come cheap. The study I mentioned also calculated the average cost of market timing, and found that on average it costs investors roughly 2% to 3% per year over the 20 year periods examined. If you’re cool with that, then go for it.

To be a true buy-and-hold investor, you have to stay invested all the time, regardless of what happens in the market. It takes nerves of steel to sit there and watch as half of your life savings is wiped out my Mr. Market. This has already happened twice, just in the 21st century alone. And it’s going to happen again sometime in the next 20 years, you can count on it. If you’re working and saving, then you buy at regular intervals, as your savings accumulate, and you hold on through all the ups and downs of the market. You only sell when it’s time to rebalance your portfolio or you need to cash for a pre-planned savings goal. You might have an unplanned, emergency-type need for cash, but that type of sale wouldn’t qualify as market timing.

There is a way to improve your returns while also taking advantage of the insurance policy feature that market timing offers. It’s a specific, rules-based discipline that gets you out of the market (at least partially) during economic recessions, and back in when the recession is over. Importantly, this strategy is not driven by what’s happening in the stock market. It’s driven by what’s happening in the economy. How much can you add to your returns by reducing or avoiding exposure to the stock market during recessions? At least 2% per year, and as much as 5% per year, depending on how aggressive you choose to be with the strategy.

You may have read that it’s impossible to predict when the next recession is going to arrive. This is true, if you’re trying to predict the exact month when it starts and ends. But this strategy doesn’t require that kind of precision to be effective. As long as you know, with a high degree of confidence, that a recession will begin sometime in the next 6 months, the strategy will add value. How do I know this? Because I’ve been using it with clients since 1995, and I back-tested it to 1968. It has worked in both scenarios.

Is this just a sales pitch? No. My model is open and transparent, and I will give it to anyone who signs up for my (free) weekly newsletter. Just go to my website (ZenInvestor dot org) and use the sign up form. Once you sign up, send me an email at (info@zeninvestor dot org) with the subject line “recession model.” That’s all there is to it. And if you don’t like the weekly newsletter, you can unsubscribe at any time. There is no cost, and no credit card required.





About the Author

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.