Market Timing: You're Doing it Wrong

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Last updated on July 22, 2019 Comments: 38

A recent question-and-answer article from Money Magazine illustrates the problem with timing the market. While making money in the stock market is as “simple” as buying low and selling high, emotional reactions to the market often prevent that from being a feasible strategy. The question comes from an individual close to retirement, Heidi. She lost several thousand dollars of value in her 401(k) and reacted by selling her equities and keeping the cash in her retirement account.

By the time you lose a good portion of your investment — Heidi doesn’t specify the percentage of loss she experienced — it’s too late. It’s common and expected to sell in a panic, scared to lose more value. A market downturn and quarterly statement after quarterly statement with decreasing bottom lines turn someone who thought they were immune to market swings, a risk taken to increase the chance of higher returns, into a conservative investor. And the reaction comes at the long time.

Invariably, people now scared of the stock market will wait for “positive signs” before diving back into the pool. One such positive sign is a sustained market rebound. But once again, if you wait and react to the positive rebound, you’ve missed the chance to earn the best returns — the kind that drive the statistics that claim the stock market retuns 8% over the very long term. If you are not in the stock market when the market rebounds, and wait until the rest of the world starts buying stocks again, you won’t experience the increase that makes the stock market famous.

With this in mind, it’s better not to try to time the market and react to short-term market conditions. Stay invested, but maintain (and rebalance) an asset allocation that makes sense for your future financial needs. If you need your money to last another three decades, even if you’re starting retiremement and expect to live longer, you may need the boost that the stock market can provide over those 30 years, but it doesn’t hurt to keep a portion of your portfolio — what you will need in the first ten years of retirement, for example — in something less risky.

I’m not a financial adviser, and these thoughts are just based on my observations.

The trouble with market timing, Walter Updegrave, Money Magazine, May 7, 2009.

Article comments

Anonymous says:

Thanks for taking a look, Elliot.

I wish you the best of luck in whatever investing strategies you elect to pursue.


Anonymous says:

Thanks, Rob. As I believe I said previously, I’ll take a pass until you arrive at some actionable specifics.

Anonymous says:

Bennett’s continued failure to either provide specifics on how to implement his timing strategy so it can be evaluated, or to at least have him compare its results to passive approaches, tells all.

The strategy that I recommend is called “Valuation-Informed Indexing.” There’s an entire section of my website devoted to the strategy. I’ve also recorded numerous podcasts on the topic.

The short version is that you want to go with a higher stock allocation when the long-term value proposition for owning stocks is high (this is when valuations are low) and a lower stock allocation when the long-term value proposition is low (this is when valuations are high). From 1975 through 1995, a high stock allocation was appropriate. From 1995 through 2008, a low stock allocation was appropriate. Today, a moderate stock allocation is appropriate. A calculator at the web site permits those interested to check how VII performs compared to Passive Investing.It beats Passive Investing (sometimes by a large amount) in 90 percent of the returns sequences we have seen in the historical record. But only in the long-term. Passive is often ahead for short periods of time (such as from 1995 through 2000).

There is no one allocation that is appropriate for all investors. It is not possible to set one’s stock allocation properly without taking into account one’s life goals, one’s financial circumstances, and one’s risk tolerance. But I believe that all investors should be making changes to their stock allocations in response to big price changes. The difference in the long-term value proposition of stocks changes too dramatically when prices go from low to moderate to high levels to justify staying at the same allocation at all price levels.


Anonymous says:

Bennett said:

‘Peace is really good. War can be really terrible.’

Thanks, Rob. As I believe I said previously, I’ll take a pass until you arrive at some actionable specifics.

Your friend Michael Harr can make his money as a market maker. broker, advisor, insurance salesman, and otherwise general purpose fee-taker. So he can make money whether you win or lose as an account holder of his. It’s a pretty good deal, but it has nothing to do with what the best investing strategy is. especially when every trade costs you money and puts some in the broker/advisor/market maker/ etc. chain of hungry mouths to feed.

Reading Bogle beats reading Orman anytime.

Anonymous says:

@Elliott – Why so bitter? Have you been reading too much Bogle? Someday, I hope that you meet a truly qualified financial planning professional because when you do, you will see that your comment is baseless.

As for Rob’s strategy, it isn’t a perfect one either. Most of the academic research supports a buy and hold approach to investing when the question relates to total return. However, approaches like Rob’s have an important place in the discussion–particularly for retirees. Once an individual reaches retirement, they will draw down from their investment portfolio. When comparing your strategy of passive investing through indexing inside of a strategic asset allocation model versus that of a modestly more active approach like Rob’s in a dynamic asset allocation model, you’ll find that portfolios invested in the latter will last longer. The reason? Risk as measured by standard deviation.

If you compare portfolios where one results in an average annual return that is 2% better than the other, but comes with 30% more risk, you’ll find that the lower return portfolio will last longer as a direct result of the reduction in volatility. Of course, I’m sure that Bogle has elaborated on Monte Carlo Analysis and provides that to investors free of charge so they can make informed decisions. Um, no, they don’t. They’re still using linear analysis on their website and in their financial plans.

By the way, a Vanguard financial plan is $1,000. Not exactly cheap.

Lighten up, Elliott. Many ‘advisors’ are garbage, but there exists a minority among them that I’m sure even you would say are worth their fee. Also, doesn’t Vanguard make money regardless of investment performance? Just curious.

Anonymous says:

As for Rob’s strategy, it isn’t a perfect one either. Most of the academic research supports a buy and hold approach to investing when the question relates to total return.

I strongly agree that my strategy (I call my approach “Valuation-Informed Indexing”) is not perfect. I believe that we need a national debate on the flaws of the Passive Investing model. This model has been marketed so heavily for so long that millions of investors (and many experts!) have come to believe that it simply must be the right way to go. I agree with Rob Arnott that we are in the early days of a “revolution” in our understanding of how investing works. As the debate expands, I believe that all sorts of once-thought-settled matters are going to be brought into question. Only then will there be hope for anyone (I doubt very, very much that it is going to be me!) to develop an all-encompassing “perfect” strategy. We’re not where we need to be to even attempt such a thing today.

I do NOT agree that a buy-and-hold passive approach can work. There are indeed many studies that suggest this. But the studies that suggest this do not consider how devastating the financial losses are in the wake of the huge bull markets that are caused by the popularity of Passive strategies and how unlikely it is that any but a tiny percentage of those investing passively will be able to avoid selling stocks when they lose most of their life savings. The Passive approach ignores most of the real-world risk of stocks. So I do not find studies premised on a belief in this model convincing.

The purpose of taking valuations into consideration when setting your allocation is to take risk into consideration when setting your allocation (risk changes dramatically with big changes in price). The big benefit of Valuation-Informed Indexing is that those following it are not surprised by huge price crashes (there has never been a huge price crash that was not signaled by insane valuation levels in the years preceding it). Valuation-Informed Indexers are the true buy-and-hold investors; by sticking to the same risk level, it becomes possible not to abandon stocks at the worst time for doing so.

Or at least that is my take re these matters.


Anonymous says:

Bennett says: “I think that market timing is essential.”
He has been touting his own rather nebulous thoughts on this for nearly a decade, but the problem is, any timing system needs to be defined, in advance!
Bennett’s continued failure to either provide specifics on how to implement his timing strategy so it can be evaluated, or to at least have him compare its results to passive approaches, tells all.
Here are two comparisons he has repeatedly been asked to make and refuses to do, claiming such requests are “impertinent and rude.” That speaks volumes.
How do the results for Rob Bennett’s Valuation-Informed Investing strategy compare to those of the Coffeehouse Portfolio over the 17-year period of 1991-2008?

How do the results for Rob Bennett’s Valuation-Informed Investing strategy compare to those of the Vanguard Wellington Fund since that funds inception date?

Anonymous says:

@Elliott – I’m not sure if you’re familiar, but Rob Bennett’s strategy has been out there for a long time. It’s known in professional circles as dynamic asset allocation and it is a more effective means of addressing risk in a portfolio. However, it does not necessarily equate to automatically higher returns over time because much of the return characteristics are determined by the execution of the strategy. I’ll be doing a series on this when I get some time, but the bottom line is that some dynamic asset allocators outperform Wellington and others, but it largely depends on their ‘brackets’.

I call them brackets because a dynamic asset allocation policy might look something like this “When P/E is greater than X% above YY-year average, then overall stock allocation is reduced by X%. When P/E is X% below YY-year average, then overall stock allocation is increased by X%.”

This is a simplistic explanation, but what “long-term market timers”/dynamic asset allocators do is attempt to control risk in a portfolio based on historical markers. I stumbled into a nice chart that illustrates this out quite well at

If you take a look at the chart, what you can derive from it and Rob’s investment strategy is when the P/E’s got out of control, you would have responded by reducing exposure to equities. When P/E’s were too low, you’d have loaded up on stocks. While this looks very easy to do, execution of the strategy is far more difficult.

What has been missing from the discussion on Rob’s strategy is the fact that when markets hit massive peaks with corresponding troughs, much of the gains are in the last part of the peak so returns are often left on the table. Likewise, if followers of this strategy have their lower threshhold set too low, they may miss buying back at bottoms.

To rollout a sound strategy it takes more than this comment feed and my energy has today…I’ll hit it up sometime around the end of the month.

Anonymous says:

Overall, the problem with pounding the panic button when the market tanks lies in the timing of getting back into the market. The emotional panic that creates the sell simply can’t be found when the market recovers. The person that is frightened into selling is seldom as excited to get back into the market. In other words, the emotional drive at the sell isn’t anywhere near the same at the eventual buy. The commenter that was excited about the market dip and the incredible buying opportunity it presented was genuinely excited. The person that sold was genuinely frightened. The problem is that these are never the same people and they need to be in order to successfully pull off a timing strategy. You need to be just as excited at buying back as you were frightened at selling off…OR…you can just be dispassionate and make decisions based on data. Of course, I haven’t met anyone that’s truly dispassionate about their money.

Anonymous says:

Isn’t there a quote floating around there somewhere form Warren Buffet that says something to the effect of “When people are greedy get anxious and when people are anxious get greedy”? I’m not sure of the exact wording, but it’s the same intent. If only I were as in tune with these subtle signs as Buffet– perhaps then I could time the market too. But, at the moment, the only thing he and I have in common is a love of cherry Coke! I read in The Power of Small that he loves the stuff. Still trying to get over my fear and invest in something other than my IRA!

Anonymous says:

Whenever the debate of “Time the market” versus “buy and hold” comes up, I always remember the fact that most of managed mutual funds, which are, I’m assuming, managed by professionals who try to time markets and do the buy low sell high thing, underperfom the S&P500. That leads me to two conclusions: either the professional market timers are keeping all the profits for themselves, or the majority of even professionals can’t predict the future and can’t time the market.

Anonymous says:

@ Rassah – The stat showing that most actively managed funds underperform the S&P 500 has been abused to no end. The fact is that each actively managed fund has its own investment strategy. It runs the gamut from deep value to go-go growth and each style performs differently based on which part of the market cycle is surveyed. For example, the best value funds in the country were horrific in the latter part of the 1990s, making them part of the ‘majority of actively managed funds that underperform the S&P 500’. The group that was outperforming the market in the 1990s were go-go growth, GARP (growth at a reasonable price), and classic growth. In the early part of this decade, value funds were the top performers with deep value outperforming all other styles while all growth styles were crushed.

In addition to style attribution of returns, many actively managed funds are not established to outperform the S&P 500, but seek to control risk. Many private wealth managers will sit down with clients and tell them flat out, “We are not trying to beat the market. Our value is in solid returns with significantly less risk over time.” This is often accomplished using a value discipline coupled with the freedom to add non-common stock assets such as convertible notes, treasuries, etc.

As for ‘professional market timers’, they are few and far between in the mutual fund world. The overwhelming majority of mutual funds are locked into a specific investment strategy by prospectus. Most funds are setup to require at least 80% of assets to be placed in a particular asset class. So-called ‘go anywhere’ funds make up a very small percentage of the total mutual fund marketplace. These fund managers are highly compensated to be sure, but their market timing isn’t relevant to their job. For the most part, they can’t time the market even if they want to.

Keep in mind that a stock mutual fund manager is at heart a stock picker, not a market timer. The latter group seems to like the name asset allocation strategist these days.

What you should takeaway from this comment is (1) most mutual fund managers outperform the index when their investment style is in favor, (2) some funds are designed to capture most of the relevant index’s return, but focus more on risk measures than return, and (3) mutual fund managers are highly limited in their ability to execute a market timing strategy and that’s why asset allocation strategists exist.

Anonymous says:

I have to disagree with you here. Market Timing is indeed an essential part of any investors retirement plans. Without it you are missing out not only lowered risk/drawdowns but in some cases better overall returns than buy-and-hold. You absolutely cannot beat a “truly” diversified portfolio + a market timing/trend-following aspect. In my opinion, it is “The Killer Combo” I feel so strongly about it that I use that combination for myself, my family and my clients on a regular basis.

Smithee says:

Purely by accident, I seem to have bought into a couple things while they were at the “bottom”. The return on my Citigroup investment is 186% as of yesterday (a gain of an enormous $44), and the return on Avid Budget Group is 123% (a slightly more impressive $111.)

Of course, every time I see these numbers, I have to remind myself that I haven’t actually generated any of this money for myself. It’s just sort of theoretical money, floating out in the ether.

And now I’m struck with a first-world problem that I never thought I’d see: when do I decide to sell?

Anonymous says:

Is that 44 thousand or 44 dollars?

Anonymous says:

I think that market timing is essential. The key is that it be the right kind of market timing. Short-term market timing (expecting a good result within a year or so) does not work. Long-term market timing (going with a lower stock allocation when prices are insanely dangerous) always works.

In the situation described, the root problem is that the investor was overinvested in stocks at a time when the risk of a huge price crash was high. Had the investor engaged in long-term market timing and lowered her stock allocation BEFORE the crash, she would not have felt the need to sell stocks after the crash.

Electing not to pay attention to prices (Passive Investing) is itself an emotional strategy. The emotional decision to ignore price leads to more emotional decisions down the line as the investor sees that the strategy is not working out.

Emotion begets emotion. The answer is to think through carefully what it means to invest rationally. Short-term timing is emotional and should be avoided. But avoiding long-term timing is ALSO emotional and should also be avoided.


Anonymous says:

While my friends and family bemoaned their losses and pulled out of the market, I told them that it was bargain shopping time, and increased my investment. They thought I was being crazy and reckless. I’m sure they’ll jump back in after missing the best part of the rebound.