Stock market timing protects portfolios from a bear market hitting the loss of 50% of your hard-earned, saved lifetime investments, which comes across as a rude wake-up call to most investors. The shock of opening a 401K or IRA statement and discovering that half of your retirement portfolio has vanished is too much for some people. With so many investors feeling the pain of the recent bear market collapse in stock prices, people are now willing to discuss and review portfolio protection strategies that can help minimize future significant declines in portfolio investments.
The Secret of Stock Timing Strategies
Lost in the debate between market timers and the “buy and hold” crowd is the fact that market timing signals and strategies are a very effective portfolio defensive tool and can indicate when to exit the market. The real secret to timing the market is not choosing the best or the best new investment, but when to sell investments and switch to safer assets like Treasury bills and cash. This is by far the largest contribution market timers have ever made to portfolio investing, but few people stop to consider this fact.
Why not just buy and wait forever?
Many advocates of “buy and hold” investing will argue that eventually the market will recover, so if you wait long enough, the value of your portfolio will eventually recover. They also argue that the long-term directional bias of the market is bullish, and if you try to time it and sell, you may miss out on the market bounce. Market timekeepers actually agree that the long-term trend has a bullish bias, but there are simply better places to invest capital during a 12- or 18-month downturn. Why not just sit in cash while the market is trending down? Why watch the value of your investments erode by 50% for one year and continue to hang on for several more years hoping that 100% return will get you back to break even?
Market Timers Understand Opportunity Cost Analysis
If the market falls 50% in 1 year, it will take a 100% return just to break even when practicing a “buy and hold” strategy. In this example, if the bounce only took a year to recover, that means your capital was tied up for 2 years and generated zero return, also experiencing significant volatility in the process. What if you avoided the 50% market drop, but only caught half of the bullish rally? Your portfolio value would be 50% greater than that of the “buy and hold” investor and you would not have experienced any significant downside volatility.
Secret Stock Market Timing Weapons
The second real secret to portfolio timing is knowing which asset classes are outperforming the markets. There are several famous studies on asset allocation strategies that have concluded that asset allocation accounts for more than 92% of investment returns. This is an amazing statistic when you consider all the time and thought people spend on stock selection and analysis. Several other published studies on stock market timing [http://www.sectortimingreport.com/articles/stock-market-timing-strategies.html] have reported that significant outperformance is possible with timing strategies, and that their greatest value lies in a defensive strategy of preserving portfolio capital.
How to Practice Market Timing Stock market timing is best practiced with a longer investment time horizon and within tax-deferred accounts such as 401Ks, IRAs, Thrift Savings Plans, and Roth IRAs. With a lot of reading, research, and good trading software, almost anyone can develop a simple market timing model. If you’re short on time, there are plenty of free resources and newsletter subscriptions that can provide you with market timing data and tips to follow. At the end of the day, it’s your wallet and if you don’t protect it, who will?
