Market Timing as a Strategy - The Allure

Market Timing as a Strategy - The Allure

October 26, 2018

I was recently emailed by a client with an attachment to an article written by investment professionals about the importance of market timing as it pertains to protecting the value of your portfolio.  The article further attempted to draw the conclusion that without using an active strategy to be either all-in or all-out of the market, you sacrifice lofty returns.  Suffice it to say, when someone is claiming a simple market strategy that sounds too good to be true, it probably is.  When I first read through the article, I thought to myself, how can this be?  After looking through some of the details, here is why you have to be careful with advice and strategies you find on the internet:

1) Back Testing can reveal extremely compelling charts showing great potential returns.  Problem = people test strategies and then back test to see which is most successful.  They then show these results as a compelling strategy going forward. 

2) In practice, implementing these strategies is very challenging.  For example, there are many times where there are 'false alarms.'  The market crosses a point above or below the strategy indicator, but then quickly reverses course.  In practice, you would have to sell/ buy the entire portfolio based on those triggers which turned out to be false alarms.

3) Tax consequences matter and impact returns.  When you have a strategy that tries to time the market, the capital gains from selling results in large tax bills, not to mention transaction costs.

The reality is investing is boring, and the media's job is to get people overly excited and overly depressed based on the news of the day.  Your job is to figure out what you want out of life and over what time frame you want to reach your goals.  Then create a plan of action to reach those goals and hold yourself accountable.  Obtaining peaceful prosperity is no different.  Investing is no different.  Slow and steady wins the race.       

#investing #lifegoals #retirement