The Realities Of Market Timing

Market timing systems are based on patterns of activity in the past. Each system that you are likely to hear works well when it is applied to historical data. If it did not work historically, you would never hear about it. But patterns to change, and the future is always the great unknown.
Investors would a system of market patterns of the 1970s, which included a major bear market, which took two years to develop, saved by a large decline. But that was not what you were needed in the 1980s, characterized by a long bull market. And a system designed to have ideal not done well in the 1980s, when it was checked back in the 1970s. So far in the 1990s, every defensive strategy has ever been hurt rather than help investors.
If your emotional security depends on understanding what is happening with your investments at any given time, market timing will be difficult. The performance and direction of market timing is often defy all efforts to understand them. And they defy common sense. Without timing, the movements of the market may seem possible to understand. Every day, countless published explanations of every blip and broadcast on television, radio, in newspapers and magazines and on the Internet. Economic and market trends often persist, and they seem at least somewhat rational. But all that changes when you start timing your investments.
If your timing developed models themselves and understand it intimately, or if you are the one crunching the numbers every day, you will not know how the systems actually work. You will ask yourself, buy and sell on faith. And the cause of your short-term results may remain a mystery, because the timing performance depends on how you interact with your models with the patterns of the market. Their results from year to year, from quarter to quarter and from month to month seems random.
Most of us are in the habit of thinking that whatever is happening is happening to continue. But with market timing, that is simply not so. The performance in the immediate future will not be a bit influenced by the immediate past. This means you will never know what to expect next. * To be set by imagined a * timing simulator on this point, you know all the monthly returns of a particular strategy over a period of 20 years, in which the strategy was successful.
Many of these monthly returns will of course be positive, and a considerable number will represent the losses. Now imagine that you are writing any return on a map to draw all the cards in a hat and start looking at the cards at random. And imagine that you start with a stack of poker chips. Whenever you draw a positive return, you will receive more chips. But, if your return is negative, you have to give up some of your chips to the bank in this game. ** If the first half-dozen cards you draw are all positive, you feel pretty safe. And you will expect the good times to continue. But if you suddenly pull a card that a loss could, your euphoria quickly disappear.
And if the first card you draw is a significant loss, and you have to get some of your chips, you will probably start wondering how much you really want to play this game. And even if your brain knows that the drawing is all random, if you look pulling two negative cards in a row and your stack of chips disappear, you can begin to feel as if you are on a negative role * and * you can start to believe that the next quarter will be like the last. But the next card you draw do not be predictable. It is easy to see all this if you are just playing a game with poker chips. But it is more difficult in real life.
For example, in the fourth quarter of 2002, Nasdaq our portfolio strategy, with the goal to outperform the Nasdaq 100 index produced a return of 5.9 percent very satisfactory only for a portfolio invested in technology funds. But that was followed by a loss of 7.8 percent in the first quarter of 2003. Most investors in this strategy, at least the ones we know of stuck with it. But they experienced significant fear for the loss and a sharp resolution of shock at what she had thought was a positive trend. The same phenomenon happens with dramatic numbers in our aggressive strategies.
Some investors entered these portfolios in the winter of 2002, and then were shocked to huge losses in the first quarter so quickly after they had invested experience. Some believe that the losses were more likely to continue than to reverse rescued. If they were willing to endure been a little longer, they would have double-digit gains during the remainder of 2003, which would have restored and have all experienced their losses exceeded. But of course there is no way to know that in advance.
Most timers will not tell you this, but all market timing systems * are * optimized to fit the past. This means that they are based on data that is carefully chosen to * work * at entry and exit from the market at the right times. Remember, by this analogy. Imagine trying to put together an extended version of the Standard & Poor's 500 index, based on the last 30 years. Based on hindsight we would probably significantly improve the performance of the index with only a few simple changes.
For example, we could easily * remove * the worst performance of the industry shares from the index together with all the companies that went bankrupt in the last 30 years. That would be a good piece remove the * garbage *, which dragged down performance in the past. Say Microsoft, Intel, Dell, And add a dose of positive return, we could triple the weightings in the new index of selected stocks. We would be a new * index *, that would have produced considerably better returns than the real S & P 500 in the past. We may think we have discovered something valuable. But it does not take a rocket scientist to figure out that this strategy is little chance of producing superior performance over the next 30 years.
This simple example makes it easy to see how you tinker with data from the past to produce a * system * that looks good on paper. This practice, known as data mining *, * involves the use hindsight to study historical data and extract pieces of information that fits comfortably in a philosophy or a vision of reality. Academic researchers would be quick to say that no conclusions you draw from data mining invalid and unreliable guide to the future. But any market timing system is based on a form of data mining based on a different concept or a certain level of optimization *. * The only way you can develop a timing model is to use to figure out what worked in the past time, then apply your knowledge to other periods.
Necessarily any market-timing model is on optimization. The problem is that some systems, such as the improved S & P 500, for example, to the point that they throw the garbage * past * in a way that is probably not reliable in the future are over-optimized. For example, we recently saw a system that * some * rules for when had issued a buy signal, and then added a filter to tell how a purchase could be spent only for specific four months per year. The system looks wonderful on paper, because it raises the unproductive bought in the past from the other eight calendar months. There are no hard and fast rule for determining which systems are robust, and optimized accordingly and are optimized. But in general, for simpler systems instead complicated look.
A simpler system is less likely to be a very complex to extraordinary hypothetical returns. But the simpler system is rather behave as you would expect.
To be a successful investor, you need a long-term perspective and the ability to ignore short-term movements * significant noise. * This can be relatively easy for buy-and-hold investors. But market timing you will draw in the process, and you need to focus on the short term. They are to pursue not only on short-term movements, you have to act on them. And then you have to ignore immediately. Sometimes it's not easy, believe me. In real life, before they make a final often intelligent people * good * Check their feelings, a big step. But if you after a mechanical strategy, you need to eliminate these common-sense step and easy to handle. This can be hard to do.
You have a long time when you underperform the market, and exceed. You have your concept of normal, expected activity belong to the market when it goes down and out of the market when it comes to broadening. Sometimes you will earn less than money market funds rates. And if you timing to take advantage of short positions, sometimes you will lose money when other people are there. Can you accept that as part of the normal course of events to invest in your life? If not, do not invest in such a strategy.
A large timing system can give you bad results. This should be obvious, but market timing adds a complication to invest a further opportunity to be right or wrong. Your timing model can make all the right calls on the market, but if the timing is to apply a fund that does something different than the market, your results will be better or worse than what you might expect. This is one reason to use means that correlate well your system.
The bottom line for me is that timing is very challenging. I believe that for most investors, the best route to success to have someone else do the actual time moves for you. You can have it done by a professional. Or let a colleague, friend or family member actually make the trades for you. In this way, your emotions will not stop after the discipline. You'll be able to do on vacation, go follow your system. Most importantly, you will step out of the emotional hurdles to be removed in and out of the market.
Robert van Delden has been managing the Fund since 1998 Spectrum Group, whose goal is to help private investors, their investment returns with low risk to increase market timing strategies ..