Market Timing Does Not Work
Market Timing does not work, but why? We are all creatures of Fear and Greed, Panic and Euphoria. When the market is selling off our animal instincts kick in and we fear our positions will go lower and we sell at the wrong time. When the market is running so far and so fast, we fear we are missing out and chase equities higher and higher. These panics create opportunities, and these episodes of euphoria create asset bubbles. Can individuals overcome these panics on their own and calmly beat the market by somehow knowing when to get out completely when the euphoria is at its peak, and buy back in at the bottom when the boom-and-bust cycle has created a bottom? It would be nice, but do we actually do that? This episode of the Tom Dupree Show touches on this topic and further discusses the current state of the US Economy as well as Dupree Financial Group, LLC’s investment strategy. Listen to the Show at the bottom of this article to hear the entire discussion.
Why Timing the Market Doesn’t Work
It is impossible to truly know the bottom, and even more impossible to know the actual top while you are in it. For seasoned long-term value seeking investors that do extensive research on their own equity holdings, it is possible to know (from the information available) that a particular company is over or undervalued. If you aren’t completely devoted to these efforts, it is imperative to have a trusted advisor do the research for you. Otherwise, retail investors do a less than stellar job of exiting and entering individual equities let alone timing the market as a whole. Individuals tend to sell at the worst possible time and buy at an even worse time. But even the most seasoned traders still insist on trying to time the market as a whole. By utilizing one or a group of indicators. These don’t work over the long haul either.
One common rubric utilized is the VIX ratio. The VIX ratio is also known as the Fear Index and is a measure of the Implied volatility in derivative instruments (puts and calls) looking forward 30 days. I won’t get into the specific calculations of the VIX, but it measures the markets expectation of how quickly underlying index might change in price in the near term. Volatility increases the risk premium that investors should require on their holdings, and all other things being equal, should necessitate a decrease in equity prices. Therefore, a rising VIX should coincide with a decrease in prices. Therefore, market timers should want to sell all their holdings when the VIX is really low and buy when the VIX is really high. In theory this sounds great. However, the really high becomes extremely subjective. As discussed in this episode of the Tom Dupree Show, the most recent market bottom in June saw a VIX in the mid 40s. This is much, much lower than we have seen in multiple market bottoms. Many investors would have missed this recent strong rally waiting for the VIX to reach 80 before jumping back into the market. So, this does not work very well at all.
Studies on Timing the Market
There are several studies on market timing. But this statistic certainly states the obvious. The average index fund investor during the 20-year period from 2000-2020 earned 5.96% annualized, whereas the average annualized return from the same index fund basket over the exact same period exceeded 7.4%. Is this a fluke? No, the reason for this underperformance was largely attributable to individual market timing, good and bad. Redemptions at the worst time and sitting on the sidelines waiting for a correction were the culprits. Preparing for corrections are expensive!
Time in the Market Beats Timing the Market
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Due diligence, research, foundational discipline, and hard work is at the heart of what we do at Dupree Financial Group. These efforts are what propel us as a firm and propel our clients to stay in the market when others are fearful. It is what we do every day at Dupree Financial Group. Time in the market trumps market timing for even the savviest investors. You cannot accurately predict the absolute top, or the absolute bottom of any cycle. Many have tried, and almost all have failed. In retrospect it is easy to see the peaks and valleys but looking straight ahead you cannot. Just as Peter Lynch so eloquently stated, “Far more money has been lost by investors preparing for corrections, than has been lost in corrections themselves.”
Money can be made in Bear Markets and can be lost in Bull Markets
Listen Below for the Full 2nd Hour of this Tom Dupree Show. Listen in for a discussion of market timing, and the current market sentiment from some of the greatest minds in the Financial Industry.