Market Timing is Not Everything (Morris Vickers Commentary)

Consciously or not, everyone asks the inevitable question when making an investment decision: r

“Is this a good time to buy, hold, or sell?”r

This question leads many investors into a thought process of “timing the market,” a legal but misguided investment tactic that tries to exploit company or industry information in order to determine the best time to buy or sell. Instead, better questions for investors to ask are “What is my strategy for making these buy/sell/hold decisions?”r

Market-timing, as used by most investors, is legal and may support an overall strategy under certain conditions. However, be advised: determining when the top or bottom of the market occurs is akin to predicting the moment of the earthquake that will send California into the ocean. An accurate reading of shifts among investments can only be done in retrospect and through trend analysis. r

Market timing and its illegal companion “late trading” have received a lot of negative attention lately. This is because some fund management companies engaged in late trading by allowing favored mutual fund and hedge fund managers to make buy/sell decisions after the market closed for the day. In addition, these funds made higher numbers of trades to select investors while limiting trades by other investors. Market timing and late trading like this increases income to the management company, adds expenses to the fund shareholders, and intensifies the level of investor confusion.r

Scrutiny of these tactics is long overdue because even when used legally, market timing is suspect as an investment tactic. Mutual fund managers often advocate building a portfolio over the long term via the dollar-cost-averaging method: making regular investments to offset the peaks and valleys of a fund’s price. This consistency counters the short-term mindset of market timing … so they say. But mutual funds themselves practice market timing by changing their portfolios up to 100 percent each year in order to buy stocks with prices on the way up and sell those with prices going down. Evidently these funds don’t take their own advice. Beware of funds with high portfolio turnover rates; they are market timers. r

The next rung in the investment strategy ladder is asset allocation, which lets you diversify among market sectors. Values of stocks and funds in these areas change at different times, so there always will be some degree of balance within the entire portfolio. r

Asset allocation is best accomplished when used in conjunction with trend analysis. The opposite of market timing and late trading, trend analysis looks at the market as a unified whole to determine favorable and unfavorable indicators related to stocks, bonds, and cash. It then focuses on individual sectors and industry areas that are most likely to produce positive results for months and perhaps years to come. Buy, hold, and sell decisions can then be made in light of the unique investment strategy of the investor, taking into consideration age, short- and long-term goals, the amount to be invested, liquidation dates, and risk tolerance.r

Trend analysis monitors market sectors regularly in order to maintain the ideal balance. It assesses obvious fluctuations such as higher demand for fuel oil in the winter and the earnings implications for oil companies. But there are more intricate ones as well such as changing relationships between large and small companies, growth and value approaches to analysis, the impact of industry sectors on each other, and the effect of interest rate changes. Identifying these trends requires appropriate information and technology before they become obvious to everyone and are “old news” that has already been acted on by more resourceful investors.r

Astute investing is more than buying low and selling high based on market timing. Having a strategy and getting sound advice is the best way to begin and to receive the returns you want, and at the same time ensure that your mutual fund doesn’t end up on the front page and losing money.

(Morris Vickers is the principal at Financial Security Advisors Inc., a fee-for-service investment management firm in Rogers. He can be reached at [email protected]).r