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Market
Timing
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If you are investing in the broad
equities market,
your time horizon should generally be at least three years away.
If you need to draw on your investment capital earlier, it would be
smarter
to roll over short to medium term debt securities. The
reward/risk
ratio in equities is simply not great enough for the shorter holding
periods.
Whether the investment method is
formula-driven market
timing or buy-and-hold, performance should be measured over the period
that corresponds to your own time horizon. What matters is the
net
gain when you have to liquidate your investment. Short term ups
and
downs have no significance if your total portfolio is compatible with
your
tolerance for market volatility.
Professional market timers claim to
reduce the volatility
in their customer's portfolio. However they must move large
portions
of that portfolio between equities and bonds or cash to effectively
accomplish
the stated purpose. Their decisions are based on various
technical
indicators, oftentimes mutually contradictory. Whether
correct
or not, making large changes is difficult for many investors
psychologically.
Great discipline is required in following a particular market timing
formula.
When losses occur, as they inevitably will, there is a strong tendency
to abandon the formula. This often makes things worse than
they otherwise would have been.
There are few, if any, professional
market timers
with successful long term records. In order to
promote
their systems they usually quote short term results or present
back-tested
performance using historical market data. Performance based on
back-testing
is notoriously unreliable. The optimum parameters must be found
by
cut and try methods, i.e. tuning the system to old market data.
However
successful technical market indicators tend to destroy their own
effectiveness
with use. Thus it is not surprising that reliable indicators can
seldom be found from historical data.
Chance plays the dominant role in
short term performance.
One should therefore be wary of reading significance into short term
results.
Without valid long term records this presents a real dilemma to
professional
market timers. Fortunately for them, there seems to be no
shortage
of investors who are persuaded by short term performance. And
there
will always be another generation of novices who can be lured into
market
timing by the siren song of professionals.
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