The Reluctant Market Timer.
The only way to buy-low is if markets correct. Bring on the volatility, I say.
Everything moves relative to Treasury rates – Scott Richard, Wharton practice professor of finance.
For years investors have been reminded about the inevitable rise of interest rates from artificially low levels. Indeed, interest rates are moving up. As per PCBond.com at the end of July/12, long-term (30-year) Government of Canada Bonds yields were below 2.3%. On August 22/13, they were 3.21%. Now back to 3.06%. Bond investors are feeling the ripple effects.
Declining interest rates were one major influence that drove stock markets higher. Is it a stretch to presume that higher interest rates might at least temporarily halt the incline? This, from Economy.com founder Mark Zandi- prices of stocks, bonds and homes were driven up by the gradual decline in interest rates, a condition that is not likely to be repeated in the near future. The falling interest rate influence is over.
In June investors saw that even the perception of higher interest rates alone can cause temporary market dislocations. This from Stratfor– The Fed’s hint that it is confident enough in U.S. growth to pull back on its quantitative easing program has triggered investors to reconsider their positions. Corrections and rebalancing are a natural part of the economic process, and currently, capital that was pushed overseas by the Fed’s actions and by low economic growth is returning. This cannot help but have a depressing effect on the countries that had absorbed that excess capital. And from BCA Research– Reduced market liquidity [as the U.S. Fed tapers off Bond purchases] could exacerbate volatility in the near run.
Let’s hope so.
Wait. Volatility is good? It can be if it creates a buy-low opportunity for the patient and prepared investor.
Market timing however, doesn’t work. Not consistently. (See Economist.com). Some Institutional investors may have active market timing programs (a tactical allocation). Others might expect their external investment managers to take advantage of temporary market dislocations. And then there’s Charlie Mungers’ Golden Touch of market timing.
But most Individual investors get it exactly wrong. They may not react when opportunity does arise because they lack a cash buffer or are frozen into inaction by the headlines or perhaps the opportunity comes and goes before they even rip back the lid on the day’s first coffee. Ongoing rebalancing is a more prudent method for most.
Is it market timing or is it rebalancing?
All through 2011 and 2012, I fretted over increasing cash balances and a bond overweight (personal not Institutional) as markets moved ever higher. I was moving further from plan. (This despite a carefully crafted rebalancing strategy. Ahem. Albeit poorly executed. Cough). A rebalancing from cash and bonds to stock and real estate was necessary. But it’s simply against my investor temperament to buy unless it’s on sale. So how? And when?
On Jan 15/13, I made an ETF Wish List of several ETFs I would buy at the right price. I then set an alert for each ETF at my discount broker to notify me when the price corrected 10% and 20% from its Jan 15/13 price. If an ETF corrected 10%, I’d buy ½ (and rebalance ½ way to the intended strategic allocation). If it corrected by 20%, I’d buy the other ½. (Yes, Jan 15/13, 10% and 20% were arbitrary).
My ETF Wish List (click table for larger image)
Does it work? It’s not exactly Charlie Munger’s Golden Touch, but so far in 2013 I’ve added (to existing holdings) Emerging Markets (VWO) and Canadian real estate (VRE). Per the ETF Wish List chart below, some prices appear out of reach. But, that’s what I said about VWO and VRE on Jan 15/13. Besides, if Charlie Munger at age 89 can sit on cash for a decade waiting for markets to correct, I can be patient too.
_____________________________________________________________________________________Next time? More Risk Management. Doug Cronk CFA is a Pension Investment Officer
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