Common Portfolio Wisdom – “TIMING NOT THE KEY…TIME IN THE MARKET IS…”

Pros –

Buy and hold works well in long-term bull markets.

You cannot predict stock market action.

Cons –

Being in harmony with long-term trends is the key. Preserves capital to be used at better opportunities.

You can distinguish between normal market movement and true trend changes.

Axiom –

Market trends are intelligent, understandable, and recognizable.

There are two driving emotions in investing, fear and greed. When investing emotionally, these usually work against you which is why trying to time the market rarely works out. Even if you can take emotions out of the equation, trying to time the market means you are looking at one or two indicators (or computers are) and all of your buys/sells are based on that alone.

A basic tactical approach to managing red money can feel like market timing. It looks at technical indicators, fundamental indicators, and quantitative measures and manages the portfolio whereas the static model means the different asset classes chosen to make up the model don’t change. With a tactical approach, if an indicator sends off danger or sell signal, that asset is then sold and either invested where the signals are positive or placed in cash.

As we said last week, there are times being in cash is the best place to be. From 2000 to 2009, the market endured a major terrorist attack and a recession. S&P 500 reflected those tough times with an average annual return of -1% and a period of negative returns after that, leading the media to call it the “lost decade.” A basic tactical approach that went to cash did very well in 2008 when the market took a big dive down, however, there were years during the lost decade of great volatility where that approach ended up with a whipsaw effect. It would sell based on signals that would change rapidly causing you to then buy back in and occur trade costs as well as miss out on gains.

For that reason and others, the time in the market being key is the most accepted approach. They would say that if you missed just the 5 best days your overall returns would be greatly reduced. That is true, but the reverse is also true if you missed the 5 worse days your returns would be drastically better.

The key is neither timing or time in the market, but maybe a mix of the two. Market trends are intelligent, understandable and recognizable so why not use that to your advantage? A skillful money manager will do just that. They will not be all in or all out, they don’t try to time the market, but be in harmony with the market trends and invested accordingly.