Is market timing a snare and a delusion?

Is market timing a snare and a delusion?

From Sunday, 26 February 2012 23:28
moneylogo_optBY WARREN BOROSON

Good grief, Vanguard Asset Allocation has been merged away. Vanguard is folding its assets into Vanguard Balanced Index. Which, to my mind, is a huge blow to the whole idea of market timing. (Definition: trying to avoid bear markets by selling early, and trying to enjoy bull markets by buying early.)

I myself am an advocate of modest market timing. And so are a lot of professional investors, although they avoid the term because it has a foul reputation. When the market has been soaring – price-earnings ratios are very high – I lighten up. Or move to safer stocks or safer mutual funds. When the market has been sinking, I try to screw up the courage to “nibble” – to buy a little of this, a little of that. It’s easier to sell into a bull market than to buy into a bear market. Hercules having to clean up the Augean stables was a piece of cake compared to trying to force yourself to buy into a bear market.

I never understood Vanguard Asset Allocation. The managers never agreed to let me interview them. And I was always confounded by their decisions: They were heavily into stocks whenever I was dubious.

What did Vanguard Asset Allocation do wrong? Apparently the fund was too much in the stock market over the last ten or so years — bad years for the stock market.

Not that Vanguard AA did disgracefully. Morningstar even defends it. The fund “has posted pretty good 15-year, 20-year, and since-inception gains. The fund has merit for investors who are seeking an asset-allocation vehicle for the long haul…”

On the other hand, the fund now gets one star, Morningstar’s lowest rating. Its performance, assessed by Morningstar, has been below average, its risk high. Over 10 years, the fund has returned a mere 2.9 percent a year. Balanced Index has returned 4.98 percent a year and gets four stars, while its performance has been rated above average, its risk below average.

Now, a lot of people sneer at market timing. They consider it a fool’s game.

There’s hard evidence that, if you’re out of the market just a relatively brief time, you’ll lose much of the benefit of a subsequent rally.

Besides, people who make a spectacularly correct call usually proceed to fall on their faces. (I can’t even remember the name of that woman who got out of the market before the 1987 crash and became famous. Briefly.)

Yes, it’s hard to predict how the market will do. Because investors can behave unpredictably. Right after the crash of 1987, I was interviewing a famous investor, Mario Gabelli. I was in shock. “Mr. Gabelli, it occurs to me,” I confessed, “that I really don’t know why the stock market goes up or down.” Replied Mr. Gabelli: “Neither do I.”

So, if you want to invest in a true market-timing fund these days, what do you do? Morningstar is not enamored of any of the long-short funds it covers, like Hussman Strategic Growth. (Such funds can bet against the market.) As for market-neutral funds, Morningstar rates both Arbitrage R and Merger above average. Both follow a merger-arbitrage strategy.

Another choice would be Vanguard Balanced Index, the heir of Vanguard Asset Allocation. It practices a very modest kind of market timing. The fund intends to be 60 percent in stocks and 40 percent in bonds, and when the markets’ behavior makes the fund veer from these targets, the fund rebalances. So it will put more into stocks when stocks decline, more into bonds when bonds decline. A sensible form of market timing.

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