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The Reluctant Market Timer.


The only way to buy-low is if markets correct. Bring on the volatility, I say.

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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 StratforThe 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 ResearchReduced 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).

ETF wish list

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.

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Next time? More Risk Management.
Doug Cronk CFA is a Pension Investment Officer
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9 Comments Post a comment
  1. Eli #

    Hi Doug,

    Thank you very much for sharing this. Your post made me feel better about my own behavioral mistakes. I am not the most disciplined indexer out there. 🙂

    I think you might enjoy reading this:

    Behavioral Risk & Rebalancing
    http://www.capitalspectator.com/archives/2013/09/behavioral_risk.html

    Like

    September 12, 2013
    • Ha. Misery loves company.

      In retrospect, the blog post is mis-named. I ought to have called it ‘how not to market time’. Or maybe ‘bottom feeding’.
      The point was (and is) that I know I can’t market time and am not making any attempt to do so. I’m simply trying to let the market come to me. If the individual ETFs mentioned in the blog hit my buy price … good. If not, I’m happy to ‘not’ over-pay.

      From the article link you attached … the Gordon model (Gordon, a good Canadian boy!) … seems to capture the idea nicely. Being a contrarian (which I am) is not the same as trying to time the market (which I can’t and am not trying to).

      Like

      September 13, 2013
  2. Gordon #

    Hmm, did not know that rebalancing has a “shades of gray” or maybe is just hard to avoid reaction of our mind which is constantly telling us that there might be some inefficiencies at the market that we can exploit. Isn’t the whole idea of rebalancing to exclude emotions which usually guide us in exactly wrong direction? Since nobody knows with certainty what direction each asset class or economy as a whole will take mechanical rebalancing and staying on target asset allocation seems to be an answer. Anything else is market timing disguised in different more creative therm.

    Like

    September 1, 2013
    • Hi, Gordon.

      Again, Mea Culpa.

      As you point out … Rebalancing is intended to remove the shades of gray, to exclude emotions. No doubt about it, my approach (in this blog) is market timing. But because I didn’t ‘rebalance mechanically’ I was off plan. How was I to get back? Again, as you point out, ‘mechanical rebalancing’ is preferred and recommended. John Bogle would tell me to just buy in ‘today’ and leave it to ‘time in the market’. But my approach works for me (for my investor temperament at least) and will eventually get me closer to plan. If I were to do the math … I’ve missed plenty of upside return and dividends. (Some of which the market has given back. VWO in June. VRE in early August. And last Friday DWX dropped below $44).

      I have to chuckle. I’ve told Pension Plan Trustees ‘we all have Institutional responsibilities but we are all still Individual Investors’. Me too, I guess.

      Thanks.

      Like

      September 1, 2013
  3. Larry #

    Hi Doug, I always enjoy your posts. I wish they would appear more often. My question is how this strategy compares to the study that lump sum investing generated higher returns than almost any other mechanism of dollar cost averaging irrespective of frequency of purchases. Your point about it being about your investor temperament strikes me as emotional rather than evidence based.

    Like

    August 31, 2013
    • Hi, Larry.

      Mea Culpa.

      Getting off plan like this is absolutely an emotional issue. ‘My’ emotional issue. So this is my strategy for getting back on track. Had I been rebalancing (do as I say, not as I do), I’d be at least closer to plan. It seems to be working. At least for me. At least for my investment tempearment.

      Dan Bortolotti http://canadiancouchpotato.com/ did a great comparison of lump sum versus dollar cost averaging. Lump sum wins, as I recall.

      (I have reduced my blog posts to monthly because I went back to night school a year ago. Trying to get my risk management designation. It’s as much fun as it sounds …)

      Thanks.

      Like

      September 1, 2013
  4. Richard #

    I prefer to avoid cash and bonds as much as possible, especially with today’s yields. Instead of staying out of markets altogether I simply look for the most attractive ones and focus on them. Recently this was European and US markets, but Canada is starting to look like a good underperformer this year so we’ll see what happens in a few months.

    For the most part investors will move from one market to another based on the current trends so I hope this allows me to gradually rebalance in the opposite direction and hold assets with better returns while waiting rather than a cash buffer (naturally it can’t work out every time). This sounds something like what you’re doing now by looking for the markets that are dropping.

    The only certainty is that some markets will change a lot. Too be we don’t know which ones and in which direction 🙂

    Like

    August 30, 2013
    • Exactly the point. My cash holdings and overweight bonds got away from me. A rebalance was in order … but this is my attempt to do so in a orderly fashion.

      Like

      August 31, 2013

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