"You can't time the market" and other enervating slogans

[jacob]

I suspect that the popular sentiment that "you can't "time the market" is just a majority of current investors repeating a slogan w/o really thinking about what they're implying.

First, lets consider the time-scale of the statement: Are we talking about timing the market for the next 10 days, the next 10 months, the next 10 years, or the next 100 years? For example, it would be hard to explain the strong correlation between future 10-year returns and CAPE (about 0.8 IIRC) as a random artefact. This means that you can time the market on the decade-scale with a much above 50/50 chance. Indeed, the slogan that "you can't time the markets" seem to go along with another self-contradictory slogan that "markets always go up in the long run". Go figure! Bonus slogan deconstruction: "It's not about timing the market. It's time in the market." Again, go figure!

Hint: Again, it's focusing on a longer trend (thinking it's axiomatically true) over a shorter cycle (thinking it's axiomatically random/non-existent).

Second, lets consider what is meant by "the market": Most retailers think of a large equity index when they say "the market". However, what about real estate, commodities, fixed income, or even specific sectors of the equity market. People who do deep analysis of those seem to time them rather well, e.g. housing bubble, shale bubble, housing echo bubble, ...

Also, exactly who is the eponymous "you" who can't time the market. I've timed it pretty well even giving "fair warning" a year in advance (early 2008) and (2013). About 10% of investors, both professionals and retailers, show a consistent track record of successful timing that can't be explained by luck. (That's another thing. We often hear that "you can't beat the professionals". So let me tell you that professionals focus on different kinds and scales of trading than amateurs. It's like comparing apples and oranges.)

Of course that "you can time the market" [within certain constraints] doesn't mean that you should. The reason, frankly, is that most people fall outside of those constraints. Perhaps this is the reason for the slogans.

In particular, I don't intend this thread to be a trolling progenitor for an endless Mt Stupid debate, but more to point out that the current popular investment paradigm and its associated slogans don't apply to everyone. A fact which I fully acknowledge. Indeed, I steer friends&family towards the herd because a) it's a simple strategy that everybody can do; and 2) if they do it and ask someone else for advice, what they have won't be too far from what I told them(*).

(*) Although I admit that I do get a kick out of it when DW gets a call from her designated financial account manager and the conversation goes something like this:
A: Hi, I'm calling you to set up an appointment to create a good financial strategy for you.
B: My husband does this for me. He works/ed in finance.
A: Oh, I see you're actually doing better than the market.
B: Yes, so we're good?
A: Yes, thank you for you time and bye.
B: Bye bye.

[leeholsen]

i actually like "Sell in may and go away"

i do not have a chart, but there are seasonnally financial reason why it works more often than not and you can find histories that show it usually works. i forget exactly but historically if you just stayed in an index from something like mid-spet to mid-april and the rest of the time stayed in cash; you'd beat most funds that have to remain invested all the time.

of course, i have since moved on; but selling in may didnt get the coinage over just sounding good.

[JL13]

Ha well yeah it's good advice for the intended audience - it should be directed towards anyone who thinks they can trade in and out on a short or medium timeframe of say, less than 10 years. Those people will end up much worse off if they attempt to time the market every 6 months or 2 years or whatever. It dovetails with the phrase "the market can remain irrational longer than you can stay solvent".

But yes, on longer timescales you definitely can time the market, obviously. Like the Graham quote about how in the short run the market is a voting machine but in the long run it is a weighing machine. At some point in the future, values will resemble rationality.

You could apply the same train of thought to anything you purchase as well, right? Say if a bag of rice is normally $1 at the grocery store and it's on sale for $0.50 one week. You could say "you can't time the rice market", and it would be true, you would have no idea if it was going to be $0.25 next week or $2.00. It's kind of an inane concept though in this example. If value > price, then buy, right?

[Hankaroundtheworld]

@Jacob Could you make up a "Jacob index" that all ERE (intended) readers can follow and invest in?

[leeholsen]

@Jacob Could you make up a "Jacob index" that all ERE (intended) readers can follow and invest in?

i'd actually be curious about that myself to compare to mine.

i have been keeping track of our local, Houston; financial talk host's indicators(www.realinvestmentadvice.com) for about 6 months now and he's a little more cautious than I; but not by much.

[steveo73]

I'd be interested in how much better people do that say they can time the market or that have their own investment ideas. I personally wouldn't put my money on a low probability (I don't believe most people beat the market), low relative return (if you do beat the market by how much do you beat it) and higher work paradigm (how much additional effort do you put in).

On top of that I think that this is something that has to be judged over 20-50 years time. You can beat the market. Can you do it consistently.

Lastly tax implications would also have to be considered. I for instance in my opinion have way too much money invested in one company. I am not going to sell that stock though because I will be subject to capital gains tax. When I retire and my income is low I will then slowly sell off that company in order to minimise my tax implications.

Basically though I'm extremely skeptical of anyone stating that they can beat the market. Yeah it happens but it's unlikely that you are the one who is doing it.

[Lucky C]

Are we talking about timing the market for the next 10 days, the next 10 months, the next 10 years, or the next 100 years?

All of the above.
Over days, you can't time the market because it is too random and you can't expect to make a profit considering spreads and commissions.
Over months, you can't time the market because there is still not a strong enough correlation between various factors and alpha on that time scale.
Over about 10 years, sure the market becomes more predictable, but you can't time it market since no mortal could possibly be that patient!

"You can't time the market" is a slogan ideal for conformists. If you hear it from a few sources and go "OK it must be true", then you are exactly the type of person who would fail at timing the market - you'd be the type to buy in at the peaks and panic sell during crashes. If instead you question it the more you hear it, you are a prime candidate to be a successful market timer. You still have to put in the work, but you have the right mindset to persist when going against the crowd.

Plus further spreading "you can't time the market" is potentially beneficial to increase herd mentality, amplify boom and bust cycles, and create more opportunity for high returns in sideways markets. Passive and active traders alike should embrace the phrase!

[jacob]

Plus further spreading "you can't time the market" is potentially beneficial to increase herd mentality, amplify boom and bust cycles, and create more opportunity for high returns in sideways markets. Passive and active traders alike should embrace the phrase!

This is the attitude that my cynical self has come to adapt when it comes to investing. Now to extend it to other areas of life

[jennypenny]

i actually like "Sell in may and go away"

I always thought that one came from the money managers who sold off their non-core holdings in May so they could spend the summer in the Hamptons or Martha's Vineyard without having to babysit them.

[jacob]

It's a self-fulfilling prophecy.

[IlliniDave]

You can always time the market. I guess at the crux is, can you do it well enough to beat a low cost buy and hold strategy over an investment lifetime, and what, based purely on the timing element, are your odds of success? If you think the answer is 100% yes then the world awaits you. You could make a fortune with no risk by starting a fund and skimming 1% or more from your investors every year!

There's a continuum between the extremes of buy and hold and never ever change, and the extremes of market timing, jumping wholesale in and out of markets based on whatever criteria you favor. So these discussions usually go the pummeling-the-strawman route.

I do know my market timing successes were all dumb luck. I sold all my equities in November of 2007 mostly because of a pending divorce, and due to its aftermath and suddenly finding myself a full-time single parent, didn't think about investing at all for a year. Wound up buying back (with the puny remnant I retained after the legal proceedings) the day after the market bottomed in March 2009. During the 1999-2003 timeframe I had about 70% of my portfolio in either a single deep value stock (my employer -- gah!) or converted to a "bond-like" loan to myself from my 401k. My employer's stock had crashed in (I think) late 1998 and I jumped in big time. I found out many years later that the company was so close to bankruptcy at the bottom that I wanted to puke (even though all those years later I was holding < 3% in my employers stock and the company was fully recovered and doing magnificantly). If I'm recalling correctly the stock more than doubled by the end of 2002 while NASDAQ and the SP500 tanked. I even sold 35% of my equities and dumped it into real estate in 2014 (not because of jacob's 2013 forecast, alas) in a recreational market that still hadn't even bottomed after the mortgage crisis. Time will tell how that one plays out.

But all that affected maybe 7 years out of now almost 30 years as an investor. The first was a really stupid gamble of a youngster that luckily didn't bite me hard. The second was driven by external circumstances that had nothing to do with investing. The third was a lifestyle move. The rest of the time I just bought with every paycheck and held on for the ride.

In a binary world I'm much more buy-and-hold. But in a grayscale world today I practice a mild form of tactical asset allocation, meaning I'll lean slightly away from asset classes that are both highly valued and highly volatile in nature. Generally I won't consider moving more than 10% away from my set point. If S&P PEs start exceeding thirty though, I might throw a significantly larger anchor to windward. In my mind both buy-and-hold and a policy of prudent adjustments have merit, so I go with a both/and rather than an either/or approach.

[Lucky C]

As for other enervating slogans?
"Your home is your biggest investment!"

[vexed87]

Everyone believes they can time the market in one way or another, even indexers, surely? If we didn't, we would forever deliberate over which asset allocation we should be choosing, and never get anything done.

It's an enticing mantra designed to keep the herd on the straight and narrow but your right jacob, they don't really think about what they are saying.

I'm not making predictions here, but if index investors believe that on the long term, [insert asset class] always go up, then they themselves assume that on such and such a date (their planned retirement for instance) their portfolio will be higher than it is today, in order to retire with 4, 3, 2, or 1% WR or whatever...

What if the next crash is the 'big one' that ends consumer society, and that is instead is replaced by a 'conserver' society, forever limiting investment opportunities and making wall st. and the financial industry redundant . (Yeah, I know, fat chance! )

But it doesn't really matter, a belief that whatever portfolio we have will fund our retirement until we die would in a sense be timing the market. Change is inevitable, but we are all banking our retirement portfolio that it won't happen (yet).

[IlliniDave]

I'm not making predictions here, but if index investors believe that on the long term, [insert asset class] always go up, then they themselves assume that on such and such a date (their planned retirement for instance) their portfolio will be higher than it is today, in order to retire with 4, 3, 2, or 1% WR or whatever...

That's sort of a straw man portrait of "indexers" which is not synonymous with buy/hold strategies, btw, (although there tends to be overlap). I practiced largely buy/hold investing for a couple decades before I really even knew what an index fund was, for example.

I think one of the main points of disagreement/confusion is that of not having an explicit definition of "market timing". Those that tend to think is excessively risky with remote at best odds for success tend to define it as, for example, selling all their stock investments one day and parking the proceeds in cash, then waiting around for the right moment (days, weeks, months, even years down the road) to throw all the cash back into the stock markets. That's probably somewhat of a straw man too, or at minimum hyperbole.

Most people I know/interact with tend to operate somewhere between the two extremes, irrespective of where they side on the buy/hold versus time-the-market debate. You can have countless arguments whether things like rebalancing, portfolio tilting, investing more conservatively as you age, or any adjustment to your portfolio, is market timing or not.

All thoughtful investors have a belief (i.e., a reasonable expectation) that whatever they are investing in and whatever strategy they employ will give them a fair chance of meeting whatever their investment objectives are. I don't think very many stock (or name your instrument) investors believe markets always go up, even over the longer term relative to an individuals investing horizon. If you want to test/dispute that claim re "indexers", go over to bogleheads.org and get on one of the forums and make an unequivocal statement that [insert asset class] "always goes up" and watch what happens.

Thoughtful long term investors do believe there is a reasonable expectation that whatever they're invested in has a reasonable probability of increasing (or preserving) their wealth/income over the long haul while knowing full well that nothing is guaranteed. The risk of loss is the reason the investments tend to be profitable to begin with. You don't get one without the other.

That said, there are foolish people out there who make investment decisions based on false beliefs/premises. I don't think many of them wind up as long-term buy/hold investors, using indexed instruments or otherwise. I believe (but cannot prove) that that population is sort of self-selecting to be inclined to jump from fad to fad--the ones who practice disastrous timing by jumping from "hot"/popular strategy to "hot"/popular strategy at essentially the worst times (the antithesis of buy-and-hold even if they temporarily land on a square with that label).

If an investor's premise is that the great and ultimate financial apocalypse is at hand then the last thing he should be doing is wasting his time thinking about financial investments. All his energy should be focused on acquiring land, and equipping himself to exploit and perhaps most importantly, to defend it. Of course there's always that possibility, and sometimes even an unabashed optimist like me will hedge a little. But if my preferred lifestyle didn't somewhat overlap with such preparations, I wouldn't bother. When it comes to stocks I don't have any problem believing the corporate world will continue to grow, or at least operate profitably, well beyond my horizon.

And you made a point that I've made in such discussions elsewhere: that there is arguably an element of market timing inherent to the decision to invest in a market to begin with!

[vexed87]

Ah yes, sorry for conflating the buy and hold and indexing strategies. I should have been clearer.

[enigmaT120]

Jacob, did anything specifically prompt your OP?

[SilverElephant]

I'll have to admit to thinking that when I was at the top of Mt. Stupid myself. Before that, I just didn't understand any of it. Then I read MMM and thought nobody could ever time anything.

Than I read the intelligent investor and much more, and came around to figuring out I better just shut up about everything and get to readin'.

Although I still, personally, can't time it.

[Tyler9000]

Interesting topic.

Shiller makes a good point in Irrational Exuberance that resonates with me. To paraphrase, the problem with the Efficient Market Hypothesis in its most dogmatic sense is that it implies that effort and intelligence play absolutely no part in individual investing performance. Not only do very smart and proactive people have no advantage over anyone else because "the market" already has all information baked into the price, but very stupid and lazy people have no disadvantage. Surveying the investing universe, I find that premise completely unbelievable.

On the other hand, I do find the stats about well-educated active managers having a terrible record beating their respective indices to be compelling. So clearly it's also not an easy feat to accomplish. But there are more factors at play here than what you see on the surface, and to claim this as evidence that nothing at all can be done to mitigate uncertainty is IMHO shortsighted.

Offhand I can think of two big factors that play into this mindset -- a misunderstanding of what "the market" really means, and the natural quality of the human brain of being very poor at comprehending uncertainty. As an example, here's a chart for the market most people think of -- the total US stock market.



Given an uncertain situation with a wide distribution of possible outcomes, many people default to the idea that since the future is unknowable all action is futile. However, there are at least two good methods for improving the default spread of possible outcomes.

The first is to recognize that market returns are not pure randomly generated normal distributions, and by using legitimate valuation metrics one can estimate with a reasonable certainty whether a certain security is a good deal at any given moment. Now that doesn't mean any investment is ever risk-free, but the risk/reward tradeoff changes over time at sometimes it makes more sense than others. It also doesn't mean this is easy and that the potential return is worth the cost in time and money required to achieve it, as the sea of underperforming professional money managers after their fees certainly proves.

But even that oft-cited point also might not tell the whole story. Perhaps the market for professional money managers is actually pretty efficient, and the best ones are priced at levels that offset any gains they do generate. Also, the specific index they are measured against matters. Each index is A market, but not THE market.

That brings us to the second method for beating the market. Not every market is the same, and thinking of it in vague universal terms while comparing apples to oranges misses the point. Looking at the chart above, not every market or combination of markets in a portfolio is equally uncertain.



Think of the traditional mantra that "you can't time the market" as a factually true reality based on a financial Kobayashi Maru that is selected specifically to guarantee failure. Investment manager Kirk rejects that reality by intelligently diversifying markets and turning the odds of the desired outcome in his favor. Now the range of endpoints may also shift, but that's not necessarily a problem. Being smart with your investments in terms of meeting your important life goals is about a lot more than maximizing averages with no thought given to the odds of failing.

All that said, I think the idea that "you can't time the market" is generally good advice for most people. Lacking a certain amount of education and drive, attempting to do so is likely to do more harm than good. But circling back to Shiller's point, it's important not to fall into the mental trap of extrapolating that nobody is any smarter than you and that it's somehow foolish to take the time to proactively manage risk and uncertainty. That's not true, and you deserve better.

[eudaimonia]

I've made a lot of money due to the fact that the popular sentiment among retail investors is "you can't time the market".

When I mention that I've timed the market in 2007/08 (made a 666% cash on cash return by selling my house at the time), and again from 2009-2014 (went all in on stocks from a pure cash position) they will tell me it is "pure luck". This year alone I've made money from buying oil at $30 and selling it at $40. Again, is it luck? That's ok by me. These were low risk plays (something the general investor doesn't understand) and even if I had a 50/50 shot of being right my downside was $1 and my upside was $6. I'll take those lucky plays all day every day. As Primus says, "so is it luck? Is it?"

Also, I find it interesting that the economist who popularized the efficient market theory Dr. Eugune Fama later went on to to determine that market momentum is a key persistent contradiction to perfectly efficient markets. Fama/French (2008): Momentum is "the center stage anomaly of recent years…an anomaly that is above suspicion…the premier market anomaly." No one seems to talk about that fact.

I certainly don't contest that the average person should park their money in an index fund. However, I suggest that you not be average. Spend a few years learning the markets, learn about fear of money and loss aversion, make mistakes. Even if you can figure out a way to beat the market by 1% per year this is worth figuring out. Heck even just learning how not to have 80% drawdowns during a market meltdown is worth learning. Strangely, it seems to comfort the average investor that this is "rocket surgery", "impossible", and "not even professionals can do this". I have learned not to argue with fools because what they think about my active investing has exactly 0 impact on my results.

[BRUTE]

.. blah blah science blah ..

but the market always goes up in the long run