Beyond Buy-and-Hold #35
Market timing is the answer. For those of us willing to engage in market timing, stock returns are highly predictable and thus stocks are a high-return/low-risk asset class.
But most of us are not today willing to do this. Most of us disdain market timing.
Huh? We have available to us a means of investing in stocks that offers much higher returns at greatly diminished risk and we are not interested? How could this be so?
Market timing scares us.
There are 10 reasons.
1. We Confuse Short-Term Market Timing and Long-Term Market Timing
Short-term market timing (changing your stock allocation with the expectation of seeing a benefit within a year or two) really does not work. Lots of us hear the word ?timing? when it is used to describe long-term market timing (changing your stock allocation in response to big price swings with the understanding that you may not see benefits for doing so for as long as 10 years) and have a negative reaction even though short-term timing and long-term timing could not possibly be more different. Short-term timing calls are based on guesses as to where stock prices are headed. Long-term timing calls are based on an understanding that paying attention to price is always be a good thing when buying stocks just as it is always a good thing when buying anything else.
2. It Takes a Bit of Effort to Note What Happens in the Long Term
We see short-term timing not working over and over again just by paying attention to stock market developments. To learn what happens in the long-term, we would need to look at the historical stock-return data. And what would prompt us to do that for so long as we maintain a generalized belief that ?timing doesn?t work??
3. We?ve Heard That There is Research Showing That Timing Doesn?t Work
There is a lot of research showing that short-term timing doesn?t work. There is no research showing that long-term timing doesn?t work; in fact, all the research done on this topic shows that long-term timing always works. That?s because short-term timing really doesn?t work and long-term timing really does. But when we hear that there is research showing that timing doesn?t work, we usually do not think to ask about the particulars. We jump to the conclusion that there is research showing that neither form of timing works.
4. We Are Social Creatures
Long-term timing would permit us to obtain far higher returns at greatly diminished risk and thereby to retire many years sooner. But during extended bull market most investors are not investing rationally (this is so by definition because it is not possible for stocks to become overpriced when most investors are investing rationally). Social pressures are imposed to keep those who are aware of the irrationality from speaking up about it. Most of us place a higher prioority on fitting in socially than we do in seeing steady growth in our retirement accounts.
5. The News Is Too Good to Accept
Tell someone trapped in a dead-end job that he or she has won the lottery and he or she is likely to break into tears. We all want to be happy. But most of us have a hard time letting in too much happiness all at once. The news that it is now possible to time the market effectively and thereby to obtain financial freedom many years sooner than was previously thought possible is shockingly good news. It?s going to take us some time to warm up to the idea. We fear that we are going to be made fools of if we put our confidence in the exciting new findings.
6. We Are Unclear on the Mechanics of Long-Term Timing
There?s a Catch-22 at work here. We cannot come to believe in long-term timing until we are clear on the mechanics of how to go about engaging in it. But we are reluctant to take the time to learn about the mechanics until we are sure that this form of timing works and that the mechanics are thus worth understanding.
7. We Don?t Trust Ourselves To Make Good Timing Decisions
If there are good ways to time the market and bad ways to time the market, a responsibility is imposed on us to take advantage of the good ways while avoiding the bad ways. For so long as we can continue persuading ourselves that all forms of timing are bad, we don?t need to concern ourselves with learning the difference between the good ways and the bad ways of timing the market.
8. This Is a Paradigm Change
If timing works, nothing we have long believed about how stock investing works remains true. All the old ideas about asset allocation need to be reconsidered. All the old ideas about risk management need to be reconsidered. All the old ideas about retirement planning need to be reconsidered. Radical change is intimidating even when it promises to take us to some very good places.
9. Few Talk About Long-Term Timing
The Stock-Selling Industry would prefer that we not learn about long-term timing. They make their money selling stocks so if it generally fine with them if we continue thinking that stocks are always best. Even many people not affiliated with The Stock-Selling Industry would prefer not to have to acknowledge the benefits of long-term timing after preaching for years that timing is not necessary or even that timing is a bad idea. So it is hard to get discussions started about the benefits of timing. And we can never come to feel comfortable doing something that we have not first talked about a good bit.
10. It?s New
People were afraid of airplanes when they were new. People were afraid of electricity when it was new. People were afraid of computers when they were new. It?s human nature to stick to the tried and true until forced to do otherwise.
Rob Bennett believes that Buy-and-Hold is dead. Rob?s bio is here.