Advisors who lack a disciplined investment strategy have scared their clients into thinking that they must always stay invested. The mantra of ”you can’t time markets” has been advisors “go to” catch phrase for decades. If you walked into most financial advisor’s offices you would most likely find a chart sitting behind their desk showing you what happens when you miss the 10 best days in the market.
The industry teaches and then pounds it into advisor’s heads that markets cannot be timed. I lived it first hand over a decade ago when I worked for a large financial planning broker dealer. The “you can’t time markets” meme was taught by the company I worked for as well as the mutual fund wholesalers whose products I sold. Understand that it is not in their best interest for advisors to believe that market timing works. The industry is structured to promote long term buy and holding of investments and that’s what is taught. Advisors, by trade, are never trained in how markets or investments work. Shocker? The focus is on product placement and/or discussing client goals. The investment part is left to the so called professionals, like mutual fund managers whose mandate is to always be invested.
I even read one blog where an advisor warns his readers that something horrible could go wrong by following advisors that do market timing. This horrible outcome is usually never quantified and really how much worse of an outcome could one have market timing over staying invested in a low cost index fund throughout 2008? Two times this decade investors have lost 50% of their money by “staying the course”. I view these as straw man arguments. It’s very convenient to create a boogey man I suppose.
A Wall Street journal article by Brett Arends “The Market Timing Myth” dispels these timeless advisor scare tactics. Let’s go to the authors more salient points:
“They’ll cite studies showing that over the long-term investors made most of their money from just a handful of big one-day gains. In other words, if you miss those days, you’ll earn bupkis. And as no one can predict when those few, big jumps are going to occur, it’s best to stay fully invested at all times. So just give them your money… lie back, and think of the efficient market hypothesis. You’ll hear this in broker’s offices everywhere. And it sounds very compelling.
There’s just one problem. It’s hooey”. They’re leaving out more than half the story.
Half the story? So what are advisors leaving out?
“The best long-term study relating to this topic was conducted a few years ago by Javier Estrada, a finance professor at the IESE Business School at the University of Navarra in Spain….he found that ifyou missed the 10 best days you missed out on a lot of the gains. But he also found that if you managed to be out of the market on the 10 worst days, your profits went through the roof”.
10 years ago, during the technology bubble and subsequent crash I too had that chart in my office that showed clients what would happen if they missed the best 10 days. Everyone I knew had this chart. I never saw a chart that discussed missing out on the 10 worst days. How come no fund companies publish that?
The conclusion of this research is…
“The cost of being in the market just before a crash are at least as great as being out of the market just before a big jump and may be greater. Funny how the finance industry doesn’t bother to tell you that”.
First, let’s be clear what it doesn’t mean. It still doesn’t mean you should try to “time” the market day to day. Mr. Estrada’s conclusion is that a small number of big days, in both directions, account for most of the stock market’s price performance. Trying to catch the 10 biggest jumps, or avoid the 10 big tumbles, is almost certainly a fool’s errand. Hardly anyone can do this sort of thing successfully. Even most professionals can’t.
But, second, it does mean you that you shouldn’t let scare stories dominate your approach to investing. Don’t let yourself be bullied. Least of all by someone who isn’t telling you the full story”.
The author strikes a nice balance here. He first dispels the market timing myth, but then goes on to state that market timing is a “fool’s errand”, which can be true.
“…even if there is little point trying to catch twist and turn of the market, that doesn’t mean you simply have to be passive and let it wash all over you. It may not be possible to “time” the market, but it is possible to reach intelligent conclusions about whether the market offers good value for investors”.
Ding, ding, ding. Most advisors see investing as an all or none proposition when it comes to investing. You either buy and hold or you market time. There are strategies that fall somewhere in the middle. One such strategy is called a “trend following” strategy. There are many other strategies out there that reside in between the buy and hope and market timing approaches that could be used. All it takes is willingness to learn and the discipline to follow.
So the next time you are shown a chart that suggests that awful things might happen if you miss the best 10 days or that markets cannot be timed remember that you are only hearing half the story. The boogey man isn’t some made up advisor hunched over a computer, drooling and frantically punching keys with your money. The boogey man might just be the advisor sitting across from you not telling the whole story.
-thecynicaladvisor
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And to think we stayed with you all those years when you said “it couldn’t be done”? Glad you saw the light, but now everyone knows the “secret”. Keep up the great work.
Estrada acknowledges market timing as a fool’s errand nonetheless.
The industry is NOT built to profit from buy and hold. Wall Street is built to profit from high turnover and getting people to pay high fees for actively managed funds promising alpha that will someday justify those fees. You’re pointing your cynicism in the wrong direction on this issue.
We may be defining market timing differently. Also, the industry does profit from both buy and hold as well as turnover. The machine needs people in equities to feed it. In the retail world this is done with high volume transactions. In the advisory world it is done by buying and holding mutual funds. You have seen the massive kick backs funds pay to broker dealers and the brokers on ongoing basis for holding funds right?
In regards to brokers getting kickbacks and the industry profiting from buy and hold – this is only with funds that hold out the promise of beating the market (through market timing, stock picking, whatever), which allows them to charge much higher fees.