The Folly Of Market Timing

February 19, 2019

You Need To Do Something Different

So what do you do with this information (other than ignore, with prejudice, the endless CNBC lower-thirds asking, “Is It Safe To Buy Stocks?”) Well, to my mind, it means if you’re concerned about playing defense with your equity positions, you need to do something different.

One thing you can do, of course, is just make sure you’re diversified: Don’t own one ETF with 50 stocks in it as your entire U.S. equity exposure; own international stocks, and bonds and alternative assets as well.

The other thing you can do is to look to products that either buffer your potential losses or seek to do this timing for you. Those require another leap of faith, however, either into the derivatives market (which for some investors is a bridge too far) or into someone else’s timing methodology.

Last, you can simply try and own those stocks that will be least likely to experience big swings. Look at that chart for the last year again. While the broad market was up 3.65%, if you remove the big-swing days—both up and down—you actually got a return of almost 6%.

That’s the theory behind minimizing volatility, and it’s been behind some of the early players in the space, like the Invesco S&P 500 Low Volatility ETF (SPLV).



The so called low-vol anomaly, which drove asset flows in 2012-2013, has had its good moments and bad, but it—and its competitors—all seek to smooth out the ride, hopefully avoiding the pain of the downside while getting most of the upside.

From the above, it’s clear that these kinds of approaches generally deliver on the promise, but they can require a lot of patience. If you bought into one of these strategies in, say, early 2017, you had to ride out a pretty painful period of 2018, where you underperformed. Of course, you would’ve been well-rewarded more recently:



Next-Step Approaches?

Thinking about the low-vol anomaly—and more broadly—about playing defense in the equity markets, has come a long way in the past decade, and I don’t think there’s a one-size-fits-all solution.

That said, there are novel approaches coming to market. Whether it’s dividend investing, chasing stock buybacks, screening for volatility, using derivatives or looking at “black box” timing engines, this is an area rife with both academic research and product development.

But whatever you do, please don’t ask me whether “today’s the day for XYZ.”

Note: If you’re interested in this topic, please join me for a webinar next Wednesday, Feb.27, at 3 p.m. ET. I’ll be joined by the fine folks from QS Investors, who have some thoughts on the matter and, of course, some solutions to offer. I’ll be poking under the hood, and hope you’ll come too.

Dave Nadig can be reached at [email protected]

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