The Investor’s Carnival Game: Market Timing

December 08, 2016

This article is part of a regular series of thought leadership pieces from some of the more influential ETF asset managers in the money management industry. Today's article is by Michael McClary, chief investment officer of Akron, Ohio-based ValMark Advisers, which markets the “TOPS” brand of asset allocation models.

Given the length of the current bull market, the recent Trump rally and the Dow Jones industrial average’s passing of 19,000 for the first time, many advisors are being ask the following questions: 

  • Should I take some chips off the table?
  • Is it a good time to put my cash into the market?
  • Should I change my asset allocation?

While these questions seem innocent, and maybe even prudent, they may lead to harmful investment decisions. We feel, even with the most innocent goals, making large moves in or out of the market due to undisciplined catalysts is nearly always an example of market timing.

Market Timing Should Be Easy, Right?

In American culture, we tend to feel we can win over time if we put forth enough effort. The American spirit would tell us, if we want to beat the market, it is just a matter of getting involved and focusing on the task.

How hard can it be? Intuitively, we should be able to tell if it is generally a good or bad time to invest. We dress ourselves in the morning, we pay our taxes and we commonly follow world events. Aren’t we all qualified to be successful market timers?

In a recent analysis titled, “Invest Now or Temporarily Hold Your Cash?,” Vanguard researched some aspects of market timing. It focused on the differences between investing in a lump sum, disciplined systematic investments and individual market-timing decisions.

Its research showed immediate investing (lump sum) outperformed systematic investment plans 68% of the time in the U.S. stock market from 1926-2015 on an annual basis. Likewise, the average 12-month outperformance was 2.39%. Over a 36-month interval, immediate investment outperformed approximately 92% of the time.

This research showed that lump-sum investing has historically outperformed disciplined systematic investing. The results are driven primarily by the general growth of markets over time.

Vanguard further noted it favors disciplined systematic investing over random market timing. The preference is mainly due to what it calls the increased “potential for regret” from individual market-timing decisions.

If investors know statistically they will do better if they invest in a lump sum, why do some investors try to time their way in and out of the market?

 

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