Good thoughts here by Barry Ritholtz on market timing and the role of risk management in portfolio analysis:
“The data overwhelmingly shows that no one is ever going to make a risk assessment that allows them to top tick on the way out going to 100% cash at the highs and bottom tick at the bottom, going all in. Forget the proverbial typing monkeys writing Hamlet; even a million fund managers over a million cycles might not generate one outcome of top and bottom ticking. And if it did, we know it would be purely random. Perhaps a fairer test to the Timers would be getting out within 10-25% of a peak and getting back in within the same parameters at the bottom. (Hulbert plays with the parameters for timing in the column, but none of the Timers does especially well).
Regardless, that one in a million-million trades misses the point. Individual investors should not market time, but they should be aware of other factors when they make capital commitments.
I prefer to employ Risk Analysis rather than engage in pure Market Timing.”
Read the full post here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.