Ask Reno Frazzitta what he thinks of market timing — the theory that you can profitably buy and sell by predicting future stock movements — and he wastes little time with an answer: “With extremely few exceptions, it’s a losing battle.”
Frazzitta, the president of Smart Money Investors in Sterling Heights, Michigan, says that while day-to-day market movements are “completely random events,” tracking tangible measures over time much more reliably opens the door to making money. Economic growth or corporate profits, for example, “tend to affect longer-term trends in the markets over months and years,” he says.
Those who would defend market timing would say it’s not an inexact science because it relies on applying technical indicators to specific investments. But when it boils down to buying and selling at just the right time, many experts sum up their views like this: If market timing principles hold up, you’d have certainly heard about it by now — and joined the crush of people making a killing.
“Yes, market timing sounds sexy and sometimes can be achieved sporadically,” says Terence Pitre, an associate accounting professor in the undergraduate and graduate business programs at Saint Mary’s College of California. “It is, however, not for the faint-of-heart, part-time investor, or one with limited financial resources and time.”
He estimates that the charts, technology and information needed to give it a go can run “upward of $45,000.” And mostly, that buys you access to past market behavior and trends, “which are not guaranteed to repeat themselves,” he says.
The irony here is that market timing, so often pitted against a longer-term buy-and-hold investment tactic, has little chance of working in the long run.
“Unexpected events having either a positive or negative impact on a company, industry or sector are virtually impossible to anticipate,” says David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business. “By contrast, the antithesis of market timing, which is a buy-and-hold strategy, is likely to succeed” — a truism, he notes, replicated time and again in study after study.
Speaking of the long run, even those who have staunchly stuck by market timing have changed their stripes over the years. At its launch in 1983, Seattle-based Merriman Inc. was a money management firm and newsletter publisher that sang the praises of market timing. But over two decades, the company shifted to a diametrically opposite viewpoint. Now “we encourage our clients to adopt a long-term view of investing,” Merriman’s website states, “because it reduces risk and increases the likelihood of success.”
About the only time market timing can reliably succeed, experts say, is when you employ a much gentler variant of it based more on investing and rebalancing in a particular sector.
“While you can’t market time stocks, we do believe in rebalancing your portfolio after volatility,” says Bradford S. Bernstein, senior vice president of wealth management with UBS in Philadelphia. “This helps you buy low and sell high, enabling you to work toward your personal goals without making emotional decisions based on day-to-day market performance.”
And for those in the quickie market timing camp, therein lies the rub: “You have to be right twice — you have to get out at the right time, and then you have to get back in at the right time,” says Ken Weber, president of Weber Asset Management in New Hyde Park, New York, and author of “Dear Investor, What the HELL are You Doing?”
How firmly against market timing is Weber? “I’ve often told clients that when it comes to market timing, the worst thing that can happen is for you to try it and be right,” he says. “Why? Because then you think you can do it.”
Indeed, finding any persuasive evidence in support of market timing requires a rather deep dig. A 2002 study by an economist who worked at the Federal Reserve Bank of Kansas City concluded that it “may be possible” — “may” being the key word — to improve on a buy-and-hold strategy, thus avoiding “some of the market downturns.” Notice the word “some”?
And that analysis was published well before the Great Recession, let alone the first iPhone.
Fast forward to 2015: Search “market timing” in the Apple Store and you’ll find there’s no app for that. Nor is there any gathering enthusiasm for the application of a market theory that is, if you will, no longer timely — assuming it ever was.
“Market timing is a scam,” says Robert Novy-Marx, a professor of finance in the Simon Business School at the University of Rochester. “Timing won’t lower expected returns relative to a steady exposure with the same average leverage. But it adds lots of luck, good and bad. You might get it right — and someone always does, and they’re happy to tell you what a genius they are. But you are just as likely to sell too early, or get back in too late, or too soon.”
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How Market Timing Creates Investment Chaos originally appeared on usnews.com
