The failure of market timing and the value of risk management



Many advisors promote passive investment strategies by citing studies showing that investors fail at “market timing.” This was a point raised recently by Ralph Wakerley. Witness it:

“The so-called experts tell us about the upcoming uber-bear or why the bull market will continue. Yet the data shows that predicting the direction of the market toward time-bound buying and selling is the wrong approach to investing.

“Data from the last seven bear markets shows that many losses and gains occur in concise periods, requiring timers of astonishing precision and resolution. Investors are best served to ignore market calls and follow the proven practice of holding well-diversified portfolios that meet their objectives over long market cycles.

Although Ralph is correct in his statement, his solution is simplistic.

“Investors should set their investment goals, determine an appropriate investment plan and asset allocation, and stick to them for the long term.”

In other words, you just “buy and hold” a portfolio of passive index funds, and you’ll be fine.

On the surface, the argument seems solid. If you want average market performance, buying a basket of index funds will give you average performance. There is nothing wrong with that. However, you hardly need to pay a consultant’s fee to do this job.

However, there are two important issues with the analysis that need to be clarified.

  1. There is a major difference between “market timing” and “risk management”; and,
  2. Suffering large capital drawdowns during bear market times destroys financial goals.

In this article, we will explore these two points.

Market timing versus risk management

The act of “market timing” is often misunderstood by advisors who promote “passive strategies”. Market timing is the act of being “all-in” or “all-out” of the market at any given time. The problem with market timing, confirmed by repeated studies, is that individuals cannot successfully replicate the profitable timing of buys and sells.

Market timing is usually framed in a way like below:

“Examining data dating back to 1930, Bank of America found that if an investor missed the S&P 500’s top 10 days in each decade, the total return would be just 91%, significantly lower than the 14,962% return. for investors who have remained stable throughout the decade. the slowdowns. – Pippa Stevens on CNBC

But here is its key point, which ultimately invalidates its entire premise:

“The company noted this stunning statistic while urging investors to ‘avoid panic selling’, stressing that ‘best days generally follow worst days for stocks’.”

Think about it for a moment.

“The best days usually follow the worst days.”

The statement is correct because the S&P 500’s most significant percentage gain days tend to occur in clusters during the worst days for investors.

(Source: Refinitiv; graph from

The “missing the 10 best days” analysis of the market is rooted in the myth of the benefits of “buy and hold” investing. (Read more: The definitive guide to investing.)

While the “buy and hold” strategy works very well in a long-term rising bull market. It fails in a bear market for two simple reasons: psychology and capital destruction

Dalbar regularly points out that individuals systematically underperform the benchmark over time by allowing “behaviours” to interfere with their investment discipline. This psychology also impacts “buy and hold” strategies that often fail on “first contact with the enemy”.

As is always the case, investors regularly suffer from the “buy high/sell low” syndrome.

Even if an individual manages to control market volatility, the destruction of capital can have devastating consequences on his financial goals. As shown below, an investor who expected a 7% “compound rate of return” over his lifetime, as promised by the “buy and hold” strategies, did not achieve his financial goals. Indeed, losing a significant portion of capital and then returning to even destroys the premise of compounding.

Epoch Times Photo
(Source: Refinitiv; graph from

This is why ‘risk management’ is vital for investors, especially those employing ‘buy and hold’ strategies.

The Myth of Market Timing

All great investors in history, from Warren Buffett to Paul Tudor Jones, have one rule in common. This rule, although stated in different ways, is as follows:

“Buy low. Sell high.

Think about it for a moment. Although it’s somewhat obvious, the key to making money in the investing process is to “buy value when it’s cheap and sell it when it’s expensive.”

Yet such a statement runs counter to buy-and-hold strategies.

In 2010, Brett Arends wrote an excellent comment entitled: “The Myth of Market Timingwhich mainly focused on several points that we have raised over the years. Brett hits home with the following statement:

“For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, regardless of stock values ​​or what’s happening in the economy. “You can’t time the market,” they warn. “Studies show that market timing doesn’t work.”

He pursues :

“They will quote studies showing that over the long term, investors have made most of their money from a handful of big gains in one day. In other words, if you miss these days, you will earn bupkis. And since no one can predict when those few big jumps are going to happen, it’s best to stay fully invested at all times. So just give them your money…lay back and think about the hypothesis of an efficient market. You will hear this in broker offices everywhere. And that sounds very convincing.

“There is only one problem. It’s crazy.

“They omit more than half the story.

“And what they don’t tell you makes a real difference in whether, when and how you should invest.”

As stated above, avoiding major market declines is key to successful long-term investing. If I’m not spending most of my time making up for previous losses in my portfolio, I’m spending more time accumulating my invested dollars toward my long-term goals.

As Brett concluded:

“The cost of being in the market just before a crash is at least as high as being out of the market just before a big jump, and can be higher. It’s funny how the finance industry doesn’t bother to tell you that.

The financial industry doesn’t tell you the other half of the story because it’s NOT PROFITABLE for them. The financial industry makes money when you’re invested, not when you’re in cash. Since most financial advisors can’t manage money successfully, they just tell you to “stay the course.”

Small adjustments can have a big impact

By using fundamental or technical measures to reduce portfolio risk as prices/valuations rise, or vice versa, the long-term results of avoiding periods of severe capital losses will outweigh any missed short-term gains. term.

“Anyone who followed the numbers would have avoided the disaster of the crash of 1929, the 1970s or the last lost decade on Wall Street. Why haven’t more people done it? No doubt they all had their reasons. But I wonder how many stayed fully invested because their brokers told them, ‘You can’t time the market.’” – Brett Arends

There is no point in trying to catch every market twist. But that doesn’t mean you should just be passive and let it overwhelm you. It may not be possible to “time” the market, but it is possible to draw intelligent conclusions about whether the market is offering good value to investors.

As Brett concluded:

“That means you shouldn’t let scare stories dominate your approach to investing. Don’t be intimidated. Especially by someone who doesn’t tell you the whole story.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.

Lance Robert


Lance Roberts is the Chief Investment Strategist for RIA Advisors and editor of Actual investment report, a weekly subscription newsletter to more than 100,000 people nationwide. The newsletter covers economic, political and market topics related to your money and your life. It also hosts The real investment fair podcast, and his opinions are frequently sought by major media sources. His insights and commentary on trends affecting financial markets have earned him a place in the 2020 Refinitiv Global Social Media 100 Influencers List.

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