Valuation-Informed Indexing #71: Is It a Good Idea to Call Long-Term Market Timing Something Else?


by Rob Bennett

I favor long-term timing. Long-term timing is changing your stock allocation in response to big price swings because you want to keep your risk profile roughly constant. It always works. There is now 30 years of academic research, based on 140 years of historical stock-return data, showing that investors who engage in long-term timing earn far higher returns at greatly diminished risk, permitting them to retire five to ten years sooner than their Buy-and-Hold counterparts.

The best argument I have ever heard made against long-term timing is one that is always made by its supporters.

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Buy-and-Holders like referring to long-term timing as long-term timing. They know that the hundreds of millions of dollars that The Stock-Selling Industry has spent promoting Buy-and-Hold strategies has given market timing a bad name. When I use the words “long-term timing” to refer to long-term timing, I lose 80 percent of my readers and listeners. There are millions of investors who are unwilling today to engage in any form of market timing, no matter how much common sense or how much academic research there is supporting the concept.

So many advocates of long-term timing prefer to call it something else. They call it “risk management.” The primary purpose of long-term timing is to keep risk from going off the charts (stocks are insanely risky at times of high prices). Given the widespread bias against market timing, one could argue that it is politically astute to disguise the reality that long-term market timing is a form of market timing.

Are these people right?

I don’t think so.

I have been studying investing in an in-depth way for nine years. I have learned that effective investing can be an amazingly simple thing in the days of indexes. Al that you need to do is buy an index and then tune out the marketing campaigns of The Stock-Selling Industry telling you that there is no need to take price into consideration when setting your stock allocation and you are set. There has never been a time in 140 years of U.S. market history when that exceedingly simple approach has not worked. So I think that’s the answer for the many millions of middle-class people who don’t posses either the skills or the time to practice Value Investing (which I view as a superior approach for those willing to do the research needed to succeed at it) effectively.

The message that I want to get out to people is — Of course you need to consider price when buying stocks! Why wouldn’t you?

All of the millions of people following Buy-and-Hold strategies today consider price when they buy computers and cars and crackers and comic books. It seems to me that in ordinary circumstances we wouldn’t face even a tiny bit of difficulty in explaining why what works with everything else on the planet that can be bought for money also is what works when buying stocks.

Change the message to “you might want to change your stock allocation at certain times to manage risk” and you complicate matters. The natural question is — Why? Why is it a good thing to do this? The obvious answer is that stocks just do not offer a strong value proposition when they are selling at insanely inflated prices. Of course that’s so.

I believe that calling long-term market timing what it is constitutes the most direct way to get The Question That Absolutely Must Be Discussed But That Today Is Almost Never Discussed on the table. Stocks only offer a good value proposition when you pay  fair price for them. That’s a compelling message. We should say it that way rather than fuss it up by going out of our way to avoid the word “timing” and by adding references to “risk management.”

Ordinary people get it that you don’t want to overpay for something you buy. But they get intimidated when the discussion turns to questions of “risk management.” The direct approach will win over far more people than the fuzzy one.

My question to those who prefer that we avoid references to long-term timing is: Why is this a problem?

There was a time when we didn’t know whether market timing worked or not. Then research was done showing that short-term timing doesn’t work. Some people jumped to the unfortunate conclusion that this meant that no form of market timing worked. Shiller published research in 1981 showing that they were wrong. And we have now spent 30 years covering up the realities for fear that the people who made the mistake will be embarrassed if it is brought to the attention of the millions of investors who need to be updated on what the research says.

I certainly don’t think that we should in any way, shape or form do anything to make the Buy-and-Holders feel bad. Buy-and-Hold was a major advance. It was the first research-supported approach simple enough for the average person to follow. We should all be grateful for the many powerful insights brought to us by the Buy-and-Holders. I hope that a day will soon come when this sort of thing will go without saying (I obviously believe that as of today it is better to be sure to say it from time to time).

But the primary goal today is to inform the millions of investors who are suffering financial pain because of the promotion of Buy-and-Hold why it doesn’t work. It doesn’t work because it doesn’t call for long-term timing.

People want to avoid using the word “long-term timing” when advocating long-term timing because they don’t want to upset the Buy-and-Holders. The intentions are good. But all that they are doing by stretching this thing out is making the pain experienced by the Buy-and-Holders and everyone else 50 times worse than it has to be.

It’s not my intent to embarrass Buy-and-Holders. It is my intent to put the mistake they made behind us. We don’t do that by pretending that there was no mistake. We do that by speaking about the matter as clearly and frankly as we possibly can.

Rob Bennett writes on how to escape the rat race. His bio is  here. 


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Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”

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