Market Timing Is Not Appropriate For Retired Investors by Chuck Carnevale, F.A.S.T. Graphs


Any discussion on the appropriateness of any “investment” strategy should start with a discussion on the important differences between investing versus speculating.  Although these are radically different concepts, it is all too common in finance jargon to ubiquitously reference all financial activity as investing, even when speculating would be the more precise term.  I believe it is vitally important for people to understand the distinctions between investing and speculating, and it’s even more important to be cognizant of which you are engaging in.

However, before I dig deeper into the subject, I want to be clear that being precise with defining investing or speculating does not automatically imply a good versus bad value judgment.  When it comes to allocating capital both concepts can be successfully profitable, or not.  Great fortunes have been made and lost by both true investors and true speculators.  Furthermore, both investing and speculating activities can be intelligently or unintelligently engaged in.

Moreover, some of the distinctions that differentiate investing with speculating are subtle in nature, while others are more distinct.  Unfortunately, the scope of this article cannot facilitate delving into all the subtleties that differentiate these two financial concepts.  Therefore, this article will only discuss two of the most important elements that differentiate investors from speculators.  The first relates to the objective timeframe or holding time, and the second relates to what the person is focusing on.

True investing implies the objective of a long-term allocation of capital.  In contrast, speculating tends to be more short-term oriented.  In line with the timeframe differential is what the person focuses on.  The shorter term orientation of the speculator requires them to be very price focused.  In contrast, the longer term orientation of the investor directs them towards focusing on the fundamentals of the business behind the stock.  Ben Graham summarized this nicely in his seminal book “Security Analysis” in chapter 4 titled “Distinctions between Investment and Speculation” where he offers the following definition of investment:

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return.  Operations not meeting these requirements are speculative.”

This brief introduction on the differences between investment and speculation provides a backdrop and foundation for the primary thesis of this article suggesting that market timing is not appropriate for retired investors.  Market timing is a strategy that is both short-term oriented and price focused.  Therefore, market timing falls into the category of speculative activity.

My personal view is that retired investors are no longer working for their money; instead, they are required to have their money working for them.  Consequently, I believe it is more prudent for those in retirement to focus on investing more and speculating less.  This is not to say that retired investors should not speculate at all, but it is to say that the majority of their capital allocations are best based on sound and prudent investing strategies.

Fundamental Based Value Investing Is Not Market Timing

My personal but anecdotal experience suggests to me that a large number of people focus solely on price when judging past, present or future investment performance.  Consequently, people that focus exclusively on price and price movement are analogous to the proverbial man with a hammer who sees everything as a nail.  Since these people typically see nothing but price, every investment strategy – no matter how fundamental it may be – is automatically considered a form of market timing in their mind’s eye.

My position was supported as a result of numerous comments in my most recent article “How Much Bond Duration Could You Endure?” where I was accused of market timing bonds, even though I never made such a reference.  This instigated a lot of discussion on market timing bonds where I was falsely accused of promoting it, and thankfully defended by other comments pointing out that I was not attempting to market time bonds.

So this article was, to a great extent, inspired by what I consider to be an off-topic discussion in the comment thread of my previous article.  However, it can also be looked at as a follow-up article allowing me to elaborate more on what I was discussing in my previous article referenced above.  Moreover, what follows ties into my discussion about investing versus speculating presented in my introduction.

Sound fundamental investing strategies are fundamentally (no pun intended) conducted devoid of any forecasts about near or even intermediate-term price actions.  To be clear, sound fundamental investing implies focusing on the intrinsic values or true worth aspects of what an investment under consideration offers.  At its core, sound fundamental investing is first about determining the current return on your invested capital that a given investment offers.

Fundamental Valuation of Bonds (Fixed Income)

When evaluating fixed income instruments such as bonds, this determination is simple and straightforward.  This is true because bonds are, by their nature, simple investments to analyze.  A bond has a par value, also known as the face value, which is simply the denomination they are issued in.  Bonds are typically issued in face values of $1,000 or increments such as $10,000, etc. Bonds are also issued in various maturities ranging from a few months to 30 years or longer.  Bonds offer a specific periodic interest payment or coupon that the bondholder receives over the life of the bond.

For example, a current 10-year Treasury bond has a 2.32% coupon.  Therefore, if you invest $10,000, you will receive precisely $232 each year for 10 years for a total of $2,320 and get your original $10,000 back at maturity in nominal dollars.  An investment cannot be any simpler than that.  However, Treasury bonds are also liquid, which simply means you can sell them at any time prior to maturity.

But liquidity implies volatility with bond prices, just as liquidity provides volatility with any other investment – including stocks.  In other words, over time a previously issued bond can sell for a premium or a discount to its par value depending on what has occurred with interest rates in the interim.  If new 10-year bonds are issued at higher coupon rates, previously issued 10-year bonds will sell at a discount and vice versa.  This again relates to the simplicity of bond investing.  Changes in interest rates are the primary driver of any potential changes in bond prices or values.

The only real complexity that comes into play is what many bond advocates refer to as duration.  Here is a definition and explanation of duration presented by PIMCO a recognized leader in bond investing:

“Duration: The Most Common Measure of Bond Risk

October 2007

Duration is the most commonly used measure of risk in bond investing. Duration incorporates a bond’s yield, coupon, final maturity and call features into one number, expressed in years, that indicates how price-sensitive a bond or portfolio is to changes in interest rates.

There are a number of ways to calculate duration, but the generic term generally refers to effective duration, defined as the approximate percentage change in a security’s price that will result from a 100-basis-point change in its yield. For example, the price of a bond with an effective duration of two years will rise (fall) two percent for every one percent decrease

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