Call A Spade A Spade
Many victims of market timing simply may not know they are doing it. We would guess most nonprofessional investors couldn’t provide an eloquent description of market timing, just as we couldn’t tell you exactly how most prescription medications work.
Toward further complexity, market timing is not a binary classification. We understand each trade made happens at a particular time and, because the market is open most days, that trade could have been made at a different time. Someone, or something, made the decision of “when.” However, we believe there are different degrees of market timing.
The gradient nature of market timing can lead to complacency. A quick carnival example might help to illustrate. “Someone who ate cotton candy” could be someone who ate two bites of cotton candy or someone who ate two bags of cotton candy. There is a meaningful difference between the consequences of eating two bites versus two bags.
Since every investment strategy involves some level of market timing, many investors fail to note the major difference in degrees to which market timing takes over their strategy. Like cotton candy, we encourage investors to exercise discipline to eat just two bites and not two bags.
Moderation As Your Guide
As Marcus Tullius Cicero said: Never go to excess, but let moderation be your guide.
To help describe our strategic discipline, we have developed the following chart, which outlines how focused market timing fits in the continuum of investment management styles:
Hypothetical – for illustrative purposes only. ValMark Advisers™