Stock Market timing is a misunderstood concept and there has been a lot of debate between the "buy and hold" crowd and active market timing practitioners about its success. Ironically, the biggest benefit of stock market timing strategies
is rarely discussed and we think its time to uncover this secret hiding in plain sight.
Stock Market Timing Protects Portfolios from a Bear Market Pummeling
Losing 50% of a lifetimes hard-earned and saved investments comes as a rude wake-up call to most investors. The shock of opening a 401K or IRA statement and discovering half of your retirement portfolio has vanished is too much to bear for some people. With so many investors feeling the pain of the recent bear market collapse in stock prices, people are now willing to discuss and review portfolio protection strategies that can help minimize future significant declines in portfolio investments.
The Secret Underbelly of Stock Market Timing Strategies
Lost in the debate between the market timers and the "buy and hold" crowd is that fact that market timing signals and strategies are a very effective portfolio defensive tool and can signal when to get out of the market. The real secret to market timing is not in picking the best or hottest new investment, but when to actually sell investments and shift into safer assets such as treasuries and cash. This is by far the greatest contribution market timing has made to portfolio investing, but few people stop to consider this fact.
Why Not Just Buy and Hold On Forever?
Many proponents of "buy and hold" investing will argue that eventually the market will recover, so if you hold on long enough the value of your portfolio will eventually recover. They also argue that the long-term directional bias of the market is up, and if you try to time it and sell, you may miss the market rebound. Market timers actually agree that the long-term trend has an upward bias, but there are simply better places to invest capital during a 12 or 18 month downturn. Why not simply sit in cash while the market is in a downward market trend? Why watch your investments erode in value by 50% over a year, and continue to hold on for several more years hoping for that 100% return just to get you back to a break-even point?
Market Timers Understand Opportunity Cost Analysis
Is the market drops 50% in 1 year, it will take a 100% return just to break-even when practicing a "buy and hold" strategy. In this example if the rebound only took a year to recover, that means your capital was tied up for 2 years and generated zero return, and also experienced significant volatility in the process. What if you avoided the 50% market drop, yet only caught half of the upward recovery? Your portfolio value would be 50% larger that the "buy and hold" investor, and would not have experienced any significant downward volatility.
Stock Market Timing Secret Weapons
The second real secret of stock market timing is knowing what asset classes are outperforming the markets. There are several famous studies on asset allocation strategies that have concluded that asset allocation accounts for over 92% of in investments performance. This is an astonishing statistic when you consider all the time and analysis people put into stock selection and analysis. Several other studies published on stock market timing have reported that significant outperformance is possible with timing strategies, and that their greatest value lies as a defensive portfolio capital preservation strategy.
How to Practice Market Timing
Stock market timing is best practiced with a longer investment time horizon, and inside tax deferred accounts like 401Ks, IRAs, Thrift Savings Plans, and Roth IRAs. With a lot of reading, research and good trading software almost anyone can develop a simple market timing model. If you don't have the time, there are many free resources and newsletter subscriptions that can offer stock market timing signals
data and advice to follow. At the end of the day its your portfolio, and if you won't protect it, who will?