Tags: Advisor Perspective | Market Timers | Investing

Advisor Perspective: Market Timers Are Playing An Impossible Game

By    |   Tuesday, 22 July 2014 02:18 PM

Market timers are playing a fool's game because they are trying to forecast random events in stocks and bonds, which ultimately is probably impossible to do.

That’s the verdict of Stephen Huxley and Brent Burns of Asset Dedication LLC, a San Francisco investment management concern, who studied stock vs. bond returns from 1928 through 2013 to come up with their conclusion.

“To be a successful market-timer, you must not only predict what will happen but also when it will happen,” they wrote in a guest column for Advisor Perspectives.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

“For example, almost everyone agrees that interest rates will go up, but no one can accurately say when. Even economists who are willing to go on the record have a hard time predicting rates with accuracy.”

Huxley and Burns said it’s been easy to make money in Treasury bonds over the last 30 years because rates have fallen from historic highs to what are now historic lows during that interval.

Now they believe stocks and bonds are at the point where timing investments in them may be harder than ever, and deciding when to re-allocate money between the two assets is likely a gamble.

The question is what happens now with bonds – and when. “Since zero is the bottom line, we know that rates must rise (or at least not fall),” they wrote.

From 1928 until about 1980, bond returns were mostly not volatile at all compared to stocks, But from 1981 to 2013, bond returns jumped from being only about 26 percent as volatile as stocks to being 76 percent as volatile – nearly tripling their volatility.

Their data showed the correlation between bond and stock returns from 1981-1995 was positive, but then returns began to move in opposite directions. “Increases in stock returns correlated with decreases in bond returns. This reversal again created problems for market-timers who rely on repeating patterns, not changing patterns,” Huxley and Burns wrote.

Even worse, when they looked at the correlation between stock and bond returns going all the way back to 1928, they found a meandering pattern that could not be predicted except by luck.

“Given the ever-changing nature of the relationships between stocks and bonds, is it any wonder that ‘experts’ are having a hard time making sense of where the market is headed in the next quarter?” they wrote.

“Investing in the long run is best served by a passive strategy that buys index funds and holds onto them as part of an overall lifetime financial plan.”

The New York Times reported a study of 2,862 mutual funds showed exceedingly few fund managers managed to beat the major index averages over time – perhaps an argument for passive investing via index funds vs. active investing via market timing.

“The study sliced and diced the mutual fund universe in a number of other ways… each time finding the same core truth: Very few funds achieved consistent and persistent outperformance. Furthermore, sustained outperformance declined rapidly over time,” the Times said.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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Market timers are playing a fool's game because they are trying to forecast random events in stocks and bonds, which ultimately is probably impossible to do.
Advisor Perspective, Market Timers, Investing
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2014-18-22
Tuesday, 22 July 2014 02:18 PM
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