Here's an overwhelming argument for market timing (the legitimate sort, not the unseemly practice that got some mutual fund companies in serious trouble a few years ago). We asked Ibbotson Associates, the Chicago financial research firm, to see how much $1,000 invested in 1926 would be worth today if the money were always in a broad basket of stocks in months the market went up and in Treasury bills during the others, with dividends and interest reinvested. The answer: $30 trillion, vs. a mere $3 million if the $1,000 were invested in stocks and remained untouched. Far-fetched? Well, $1,000 placed in the Standard & Poor's 500-stock index a decade ago would now be $2,244 for the buy-and-hold investor, but $14,561 for the prescient market timer.
It all sounds wonderful, in theory. These soothsayers are trying to pick the optimal entry and exit points by measuring data that are generated within the market itself, such as changes in prices and trading volume. They're not scrutinizing balance sheets or parsing economic fundamentals. They enact their trades in a variety of ways, using mutual funds, exchange-traded funds, and stock-index futures. Scores of professional timers, most of them mom-and-pop businesses, hawk their get-in, get-out advice to individuals on the Internet, cable TV, and through direct mail.
But the gap between perfect timing and reality is huge. In fact, 2006 should have been a timer's dream since there were powerful trends to ride: up in the spring, down in the summer, up at yearend. Consider the 100 market-timing newsletters followed by Timer Digest. The top gun, Mark Leibovit of VRTrader.com, beat the S&P 500 by just 4.5 percentage points. William Ferree Jr., the next best, topped it by 3.4 points. Timothy Lutts, the 10th best, was a point behind the S&P 500. (The Digest's returns do not include dividends and interest.)
The top 10 Timer Digest numbers are a bit better over a five-year period. Leibovit placed second in that race (up 57%), bracketed by Dan Sullivan of The Chartist (91%) and Christopher Cadbury of Cadbury Timing Service (42%). The remaining seven on the list were mediocre to worse, relative to the S&P 500's 23% price gain during the same period.
That's before taking into account any taxes owed and trading costs. Since market timing can involve rapid shifts in portfolio positions, both costs can be high (although taxes aren't a problem in tax-sheltered retirement plans). Professional timers sell their prognostications largely through newsletters and online services priced between $200 and $1,000 a year. Many manage client money, too.
The data generated by longtime newsletter analyst Mark Hulbert of the Hulbert Financial Digest are different. But the result is much the same. Hulbert looked at the record of 103 market-timing strategies over the past 10 years. Several did quite well compared with the 8.3% average annual gain in the S&P 500. For instance, Bob Brinker's Marketimer recorded a 13.7% annualized return. But here again, the 10th best timing system only gets you slightly better than the S&P 500 return. Hulbert interprets the data as confirming his 80/20 rule: 80% of timers fail over any reasonable period of time. He adds that the performance numbers got a boost from a bear market in the early 2000s. "Bear markets make market timers look like geniuses because they have some money in cash," says Hulbert. Most mutual funds, for instance, stay nearly fully invested in stocks, so take a hit during bear markets.
What do the more accomplished timers have to say about the market now? Leibovit, for one, is guardedly optimistic. Based in Sedona, Ariz., the veteran timer uses a number of proprietary indicators. "I think 2007 will be an O.K. year with a lot of volatility, and on balance, the market will be up until the fall," he says. "I'm not too happy with the market after the fall and going into 2008. Be careful."
On the other hand, veteran market seer Joseph Granville, the eighth best in Timer Digest's five-year rankings, already is far more bearish. He confidently predicts the Dow Jones industrial average will plunge to 7,100 from its current 12,666. "It will completely surprise Wall Street," say Granville. The octogenarian, based in Kansas City, Mo., achieved celebrity status decades ago when he correctly pegged the 1977-78 bear market. His reputation suffered after wrongly predicting a 1982 market crash.
Interestingly enough, though individual timers can easily err, there is some merit to their collective wisdom. Timer Digest, for instance, gets recommendations from its 100 or so timers each week and draws a consensus--bullish, bearish or neutral--from the week's top 10. According to Hulbert's figures, one of Timer Digest's systems produced an 11.3%-a-year return over the past decade, besting the S&P 500 by a full three percentage points. The other was just a shade behind, at 11.1%. Most professional investment managers would kill for those kinds of long-term results.
By Christopher Farrell