Market Timing versus Diversification and Re-balancing.

I want to hear your feedback to a thought that occurred to me that is a negative for Diversification and Re-Balancing.

I had a teleconference with a Personal Capital representative. He was selling me their services versus Fisher Investments. Fisher Investments' strategy is more of market timing - they assess which sectors and countries will outperform or under-perform. They change their portfolio based on their outlook, overweighting the portfolio with the sectors/countries they think will out perform and under-weighting the ones they think will under-perform. Personal Capital claims no one has a crystal ball and market timers have a dismal performance history. Their strategy is to diversify among the company size and sectors and re balance. For example, between stocks and bonds, as stocks go up, they will sell stocks to buy more bonds to maintain the preset mix. If stocks go down, they sell bonds to buy more stocks, again to keep the preset mix. The idea is you're buying more of whatever is going down to maintain the mixture balance.

I get that no one has a crystal ball. I buy that market timers have a dismal record. However, as he was explaining the diversify and re-balance strategy, I thought I simplified (in my mind) the comparison between the two. Market timers time the market proactively while diversify and re-balance time the market retroactively and neither is inherently superior to the other.

The flaw that is the negative that I see for diversify and re-balance is this: Imagine that at a given point your portfolio is diversified and re-balance. Some time after, the stock market goes down say 25% enough to trigger a re-balance. You would sell off some bonds in your portfolio and buy more stocks that are now priced lower. Your mix is again balanced but, obviously, your pie is smaller. Everything is fine and dandy but only if the market starts going up. If it drops down another 25%, then all you've done is sold a portion of your bonds that were safe into stocks that lost some more. And your pie is smaller still. You again re-balance by selling more bonds and buying more stocks but only on the hope (outlook) that it's time for the market to start going up again. Then on a rising market, you keep selling the stocks that are growing to buy more bonds that are returning a lot less. I don't see this strategy as inherently better than Market Timing.

And I've learned about diversification and re-balancing in school and accepted it then as a solid strategy. Now, I'm seeing it's not. What do you think?

How does Fisher determine what direction sectors or stocks will move? Are they using fundamental analysis (i.e. instrinsic valuations like P/E ratios), or technical analysis (technical indicators and economic data)?

Although the definitions blur into each other, perhaps they are using valuation-timing vs. market-timing. Or a little of both. I sort of feel like valuation-timing has a more solid track record vs. market-timing (which everybody blasts, though investors continue to try). I see a lot of fund managers overtly basing their strategies on value-investing, but few brazenly claiming to be successful market-timers.

I tend to see the flaw like you do.

Being more of a dinosaur myself. I subscribe to the philosophy of assess my own risk tolerance and balance accordingly.

Make very occasional adjustment if I feel I am off a bit of something makes sense. Otherwise run with it.

I dunno, maybe I am just too damn old fashioned.

What’s wrong with value investing?

Guessing which stocks or sectors will move is market timing.

Fisher is the son of legendary investor Phil Fisher. https://www.investopedia.com/u...est/philipfisher.asp

Get his book.

Compare them to a good index fund, after fees.
How do they do?

The simplest answer to your question is that you shouldn't invest in the market if you are not confident that it will rise in the long run. And you should not put money in the market that you cannot leave in the market long enough to recover from any downturns.

Almost no active investors, picking stocks, segments, timing, whatever- almost none outperform the market index funds.

There are people that can beat the market, but if they can they are probably doing so, not trying to sell you their services. If you had a formula that consistently won at the horse track, would you be betting the races or selling tip sheets? It's about the same thing.

I cannot remember where I read it, but a few years ago I read about a strategy when ready to retire. If you think the market will go down (correct), how long do you think it will last?...2 years, 5 years, etc... I'll go with 5 years for this example. Also, how much do you plan on pulling out of your retirement account per year? I'll go $40k for this example. The strategy says put $200k (5 years X $40k) into "safe" investments, i.e. cash/bonds. Put the rest in low cost index funds. Each year pull out your $40k from your index funds and re-balance.

With this approach you will have the ability to ride out any market correction.

I view this as a good strategy when I am very near retirement age. I am currently 44, so I am close to 100% in stocks...all low cost mutual funds. I am of the opinion no advisor can beat the market on a 10 year average, perhaps even a 5 year average, after accounting for fees. Work out a model in Excel to see the effect of a change in fees over the long term. It's quite surprising.

I still have my old 401k with a prior employer (Accenture). The reason I left my money there is the low cost of the funds they negotiated. They are significantly lower than "retail"...even for Vanguard. Vanguard S&P 500, .02%, Vanguard Value Index .08%, Vanguard Mid Cap Index .06%, Vanguard Small Cap Index .06%.

With the S&P Index fund fees at 2 basis points, the actively managed fund has to beat the market by quite a bit to even break even. The odds of that happening over the long term are very slim.

What are the fees, as a percentage, associated with those accounts? Can they provide you with returns, including fees, over the last 10 years?

I am not a professional, so my advice is worth what you pay.

Here is another example of a disciplined investor, illustrating things are seldom ever perfect.

Charles Brandes has done very well, but not without some rough patches or two. It happens!

quote:

Originally posted by honestlou:
The simplest answer to your question is that you shouldn't invest in the market if you are not confident that it will rise in the long run. ...

That's how to look at it. If you are worried about some doomsday scenario where the market goes down 25% year after year, you shouldn't be in the market.

From personal experience I can tell you that if you are right you will make a whole lot more money putting all your eggs in one basket and watching it closely. From personal experience I can also tell you that being diversified (or di-worsified as we used to call it when I young, worked at cisco and thought people were idiots if they didn't put all their money in cisco) is a whole lot better way to hold onto your money when your crystal ball isn't quite as good as you think it is.

The two main things driving the stock market are greed and fear. Also, FOMO (fear of missing out) is a real thing...

quote:

Originally posted by Rey HRH:
The flaw that is the negative that I see for diversify and re-balance is this: Imagine that at a given point your portfolio is diversified and re-balance. Some time after, the stock market goes down say 25% enough to trigger a re-balance. You would sell off some bonds in your portfolio and buy more stocks that are now priced lower. Your mix is again balanced but, obviously, your pie is smaller. Everything is fine and dandy but only if the market starts going up. If it drops down another 25%, then all you've done is sold a portion of your bonds that were safe into stocks that lost some more. And your pie is smaller still. You again re-balance by selling more bonds and buying more stocks but only on the hope (outlook) that it's time for the market to start going up again. Then on a rising market, you keep selling the stocks that are growing to buy more bonds that are returning a lot less. I don't see this strategy as inherently better than Market Timing.

If you're going to use a re-balance strategy IMO it should not be done as an immediate reaction to market swings. Most "corrections" tend to actually be an "over correction," and the market tends to swing back the other way. If you give time for things to settle and then re-balance, you avoid the problem you're describing.

I have 95% of my investments in stocks, and 5% in bonds. I re-balance once a year, to shift back to those percentages. If there is anything unusual going on with the stock market, or bond market, I will wait, usually months, before I re-balance.

If you re-balance in reaction to any huge swing, you're actually market timing, but doing it in the worst way possible.

quote:

Originally posted by slosig:
From personal experience I can tell you that if you are right you will make a whole lot more money putting all your eggs in one basket and watching it closely.

There are many former ENRON employees who would disagree with that philosophy.

quote:

Originally posted by DMF:

quote:

Originally posted by slosig:
From personal experience I can tell you that if you are right you will make a whole lot more money putting all your eggs in one basket and watching it closely.

There are many former ENRON employees who would disagree with that philosophy.

Did you miss the second half of the post?

“From personal experience I can also tell you that being diversified (or di-worsified as we used to call it when I young, worked at cisco and thought people were idiots if they didn't put all their money in cisco) is a whole lot better way to hold onto your money when your crystal ball isn't quite as good as you think it is.”


Or perhaps it is easier to read without the backhanded swipe at Young and full of hubris:

“From personal experience I can also tell you that being diversified is a whole lot better way to hold onto your money when your crystal ball isn't quite as good as you think it is.”

quote:

Originally posted by kkina:
How does Fisher determine what direction sectors or stocks will move? Are they using fundamental analysis (i.e. instrinsic valuations like P/E ratios), or technical analysis (technical indicators and economic data)?

Although the definitions blur into each other, perhaps they are using valuation-timing vs. market-timing. Or a little of both. I sort of feel like valuation-timing has a more solid track record vs. market-timing (which everybody blasts, though investors continue to try). I see a lot of fund managers overtly basing their strategies on value-investing, but few brazenly claiming to be successful market-timers.

To answer your question as best as I can from talking with them, individual stock picking is their lowest priority.

The first step for them for the individual is determining the percentage of stocks and bonds based on risk tolerance, objectives, and time horizon.

For the stock portion, they start with the MSCI World Index as a benchmark which, as the term implies, is across the world and countries. Then they "make a call" as to which countries and which sectors will outperform or underperform the other countries or sectors. For example using random numbers, if US is 50% of the index and Spain is 5% and if they believe US will underperform and Spain will outperform, they will adjust their actual portfolio so that US is 47% and Spain is 8%. Same with sectors.

Then buying the specific stocks in each sector and country they don't go into detail explaining but I get that it's some technical analysis.

What they sell most is their ability to call the individual sector or country. That remains to be seen by me.

That does not make me all warm and fuzzy Reh.

I would not get involved with someone selling something like that myself.

Short answer: both strategies can be effective.
Google: tactical asset allocation

quote:

Originally posted by 220-9er:
Compare them to a good index fund, after fees.
How do they do?

That is no fun.

After many years of trying just about everything, I now invest almost exclusively in Vanguard index funds and have never looked back.

quote:

Originally posted by JALLEN:
What’s wrong with value investing?

Guessing which stocks or sectors will move is market timing.

Fisher is the son of legendary investor Phil Fisher. https://www.investopedia.com/u...est/philipfisher.asp

Get his book.

Nothing wrong with value investing; I own shares of Bershire Hathaway.

Your post brings up yet another way of slicing and dicing strategies: Value vs Growth investing. And both of those could be compared to indexing.

But to take a step back, I think between Value and Growth investing, neither is superior to the other without the backdrop of what is happening in the stock market currently. I think there is a case to be made that one should not be wedded to one or the other in times when the investing environment is better suited for one of them.

I suppose one can even allocate a portfolio between growth and value stocks and adjust the percentages as deemed appropriate for a given period.

That article you link confuses me. It says Fisher liked growth stocks but he bought them at a low price which sounds like value investing to me.

quote:

Investments' strategy is more of market timing - they assess which sectors and countries will outperform or under-perform

I wouldn't call this market timing as much as I would call it common sense.