Is Market Timing the Answer?

The question I asked in the recent Converesation was fairly straightforward: how do you handle your new role as your clients' macroeconomist?  I was expecting advisors to talk about using mutual fund managers who were top-down-oriented; in fact, I am seeing a lot of advisors shift rotational spins on their manager selection process, moving from excellent bottom-up fundamental managers to funds that take a more global, macroeconomic, top-down approach to surfing the opportunity set.

For two reasons. First, you get an overlay of thinking about which assets are overvalued and which are undervalued, which seems to matter for long-term returns.  Roger Gibson's presentations now include a slide which breaks down PE10 ratios into quintiles, lowest to highest.  When you invest at the lowest quintile, your average annual return for the next ten years is 14%.  When you invest at the highest quintile, the returns are dramatically lower.  This is the U.S. market, large cap stocks, but none of us would be surprised if the same pattern held true for virtually every category of stocks in every international market--and for other asset classes as well.

Second, these funds tend to give out a LOT of macroeconomic thinking and information to their advisor investors, which you can pass on to clients in your own communication materials--an extremely important value-add for fretful clients.

What does market timing have to do with this? 

One of the postings has started us all on a discussion of another possible way to handle this macroeconomic chore: actually do your own evaluation of the markets and decide whether to be in or out. 

In the discussion, I share three experiences with market timing; the performance results of thousands of market timers from a market timing database--showing what the market timing community did during the 2008 year of trauma.  Another story talks about an advisor you probably know of, and his current experiment with what might be called market timing.  And a third talks about an advisor who has created a very interesting and sophisticated model, which he uses, which offers market timing information that he doesn't act on--for interesting reasons.

You're invited to chime in whenever you have a free moment.  To participate, click on the link below.

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