Tags: Lee | market | timing | return

Morningstar's Lee: Not Market Timing Is a 'Noble Lie'

By    |   Friday, 13 December 2013 07:10 AM

The ban against market timing is a mainstay of financial advice.

However, it's a "noble lie," asserts MorningStar strategist Samuel Lee.

Go ahead and break that cardinal rule — at least sometimes, he says. Just make sure to do it in a contrarian fashion.

Editor’s Note:
Pastor Explains His Biblical Money Code for Investing


The advice — along with other traditional stay-the-course commandments involving dollar-cost averaging and proper allocations — is good overall, as it's meant to keep investors from hurting themselves.

That's because many are market timers at heart. They buy high and sell low. The truth is that it is possible to time the market — if only over long time periods, Lee maintains. Research by Nobel Prize winning economists Eugene Fama and Robert Shiller has shown that when valuations are low, expected returns are high. And when valuations are high, expected returns are low.

Other experts also reported that valuations can predict returns as far back at the 1980s.

The rule probably lasts, Lee theorizes, because telling investors to "stay the course" is easier than getting them to "buy when there's blood on the street, even if it's your own."

Evidence that fund managers can time the market is scant. That doesn't necessary mean it's impossible, Lee says. Statistical tests have difficulty measuring that ability, as business cycles are long, usually about five years.

Still, even long-term stock returns are hard to time, Lee writes. "The cyclically adjusted price-earnings ratio, or Shiller P/E, one of the best valuation signals, will give you only a ballpark range of returns over the next five to 10 years."

Bonds, on the other hand, are much more predictable and easier to time. Returns for the next three years will be close to the starting yield.

"Yes, Virginia, you can time the market — if you have the brains and the courage to do so. I wouldn't be surprised if lots of experts preaching buy and hold are closet market-timers. Academics can be notorious hypocrites."

Timing the market even over the long term is difficult. Few fund managers or advisors can close to calling the market top in October 2007 or its bottom in March 2009, Mark Hulbert writes in a column for Barron's, after reviewing returns of more than 100 market-timing newsletters and Web-based advisers monitored by the Hulbert Financial Digest.

Relatively few substantially changed their exposure to equities within a month of the top or bottom. However, about one in four did beat the buy-and-hold strategy over the last 5 1/2 years.

Editor’s Note: Pastor Explains His Biblical Money Code for Investing

Related Stories:

© 2019 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
InvestingAnalysis
The ban against market timing is a mainstay of financial advice. However, it's a "noble lie," asserts MorningStar strategist Samuel Lee.
Lee,market,timing,return
452
2013-10-13
Friday, 13 December 2013 07:10 AM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved