Market Timing or Rebalancing?

Market timers allegedly have models allowing them to move money flawlessly between global markets while avoiding all stock market corrections.  Market timers use a bevy of indicators like the CAPE ratio, Bollinger bands, and candlestick patterns to determine if their client should go long, short or neutral the stock market.   

Tactical asset allocation is a fancy term for market timing but the process is the same.  Tactical asset allocation sounds more professional than market timing but the results are the same; trying to time the market is a waste of time.

Market timing is challenging because you must be right all the time and it must be repeated, correctly, for the rest of your life for you to outperform the more traditional buy and hold model.  Your tactical trading model might flash a sell signal today, but will it flash a buy signal tomorrow?   

In a 2014 Dalbar study, the S&P 500 generated a 30-year average annual return of 11.1% while the individual investor made 3.7%.[1]   The market timer was left with less money when compared to the buy and hold investor.   A buy and hold investor who invested $100,000 in the S&P 500 made $2.35 million while the market timer made $297,000.   The buy and hold investor accumulated $2 million more than the market timer.

Dimensional Fund Advisors found a similar result amongst mutual funds.  In a fifteen-year study of equity mutual funds, only 17% of the funds they studied survived and outperformed their corresponding benchmark.[2]

Rather than trying to time the market, rebalance your account instead.   Rebalancing your account will align it with your financial goals.  Your financial plan will determine your asset allocation and investment selection.   For example, after completing your financial plan, you set your asset allocation to 60% stocks and 40% bonds.    

In 2007, you invest 60% of your assets in the iShares S&P 500 (IVV) exchange traded fund and 40% in the iShares Core Aggregate Bond Fund (AGG) exchange traded fund.   If you didn’t rebalance your account, your asset allocation at the end of ten years was 67% stocks and 32% bonds and generated an average annual return of 6.43%.  Your current asset allocation is too aggressive based on your financial plan.  If you rebalanced your account annually, your 60% stocks and 40% profile remained intact and your portfolio generated an average annual return of 6.62%.[3]   

You can rebalance your portfolio as often as you wish but annually is sufficient for most investors.  A January rebalance is recommended because it will incorporate the prior year’s capital gains and dividend income.  

If you want to test your own market timing model, try darting in and out of traffic on a heavily congested highway and see how it goes.

Be very careful, then, how you live—not as unwise but as wise… ~ Ephesians 5:15.

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.   For more information on financial planning and investment management, please visit www.parrottwealth.com.

Note:  Your results may differ from those posted in this blog.

August 17, 2017

[1] https://www.fool.com/investing/general/2014/05/28/3-reasons-why-market-t... Jay Yao, May 28, 2014.

[2] Dimensional Fund Advisors, Pursuing A Better Investment Experience, July 2017.

[3] Morningstar Office Hypothetical Tool.