Market timing: a picture is worth a thousand words
Market timing: a picture is worth a thousand words
They say a picture is worth a thousand words.
I could easily spill a thousand words on market timing.
I could talk about how each trade involves a willing buyer and seller; each with equal interests, each with the same access to information.
I could talk about the fact that, over about 85 years, the S&P 500 has only gone up 51.02% of the days.[i]
I could talk about the concentrated nature of returns. I could show that being out of the market, and missing the best month each year, drops returns by about 7% per year.[ii]
I could talk about a psychologist from Berkeley, named Philip Tetlock - who studied over 82,000 varied predictions, by 300 experts, from different fields, over 25 years - and concluded that expert predictions barely beat random guesses. Ironically, the more famous the expert, the less accurate his or her prediction tended to be.[iii]
I could talk about Nobel Prize winner Bill Sharpe’s contention that timers need to be right 74% of the time, to overcome the frictions and costs of their moves.[iv]
I could talk about magazine covers, like the Death of Equities[v], that featured just before five years of 14.44% average compound returns for the S&P 500.[vi]
I could talk about how studies - ranging from the landmark paper by Brinson, Beebower and Hood[vii], to the most recent study on NZ managed funds - have found that the average contribution of market timing to returns is negative.[viii]
I could talk about a study of 1,557 managed funds and 210 institutional funds, where the author concluded timing ability of managers is, on average, negative.[ix]
I could talk about how the majority of market timing newsletters underperform the market.[x] I could talk about how, on average, market timing newsletters underperform the market by over 4.00%.[xi]
I could talk about how the market timing gurus whose calls are tracked, have less than 50% accuracy.[xii]
I could talk about evidence that shows economists can’t time markets either.[xiii]
I could talk about how the predictive power of last year’s return, to correctly forecast this year’s return, is 0.01%.[xiv]
I could talk about the wise words of Warren Buffett, who said, “The only value of (share) forecasters is to make fortune tellers look good."[xv]
I could talk about the simple logic that all market timing calls offset each other. If you buy, someone must sell. If you sell, someone must buy.
I could talk about a lot of things.
Or…
I could show you this picture of monthly returns and simply ask you to find the pattern.
…wishing you the very best of luck
Ben Brinkerhoff
Head of Adviser Services
New
Zealand Wealth
--
[i] www.ifa.com, “Positive
vs. Negative Returns in Various Time Periods”, 85 Years, 5
Months (1/1/1928 – 5/31/2013); S&P 500
[ii] NZX and
Returns 2.0. Calculations performed by NZ Wealth. Returns
gross of all fees and taxes
[iii] Burton Malkiel and
Charles Ellis, "The Elements of Investing"
[iv] Sharpe,
William, “Likely Gains From Market Timing”, Financial
Analysts Journal, March – April, 1975
[v]
http://www.businessweek.com/stories/1979-08-13/the-death-of-equitiesbusinessweek-business-news-stock-market-and-financial-advice
[vi]http://www.ifa.com/portfolios/PortReturnCalc/index.aspx?i=SP500&s=9/1/1979&e=8/1/1984&type=indices&g=1&infl=False&tax=False&wort=0&perc=False&wortinf=False&aorw=1&gp=False&log=False&gy=False&xp=False&iar=False&af=False#calc
[vii]
Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower,
“Determinants of Portfolio Performance”, Financial
Analysts Journal, July-August 1986, pp. 39-44; and Gary P.
Brinson, Brian D. Singer and Gilbert L. Beebower,
“Revisiting Determinants of Portfolio Performance: An
Update”, 1990, Working Paper.
[viii] Rob Bauer, Roger
Otten, Alireza Tourani Rad, “New Zealand mutual funds:
measuring performance and persistence in performance,”
Accounting and Finance 46 (2006) 347–363
[ix] Wei
Jiang, "A Nonparametric Test of Market Timing." Journal of
Empirical Finance 10 (2003) 399– 425
[x] Hulbert
Financial Digest, Businessweek 9/3/1998
[xi] Market
Timing Ability and Volatility Implied in Investment
Newsletter Asset Allocation Recommendations” National
Bureau of Economic Research Paper #4890
[xii]
www.cxoadvisory.com/gurus/
[xiii] SMH/Age Economists’
Survey, Jan 6, 2008; Jan 3, 2009; Jan 2, 2010; Dec 31,
2010;
[xiv]
http://www.ifa.com/12steps/step4/step4page2.asp#ChartFlashID86
[xv]http://www.cbsnews.com/8301-505123_162-37841089/the-smartest-things-ever-said-about-market-timing/