Anything But Market Timing

There are many definitions of market timing. Some are broad and some are narrow. Mine is broad. I believe market timing occurs when an investment decision is made based on a market prediction. That pretty much covers it all.

The phrase market timing tends to have a negative connotation, so the investment industry covers it up by calling it other names. The most often used name is tactical asset allocation. Cerulli Associates defines “tactical” as involving changes to a portfolio’s allocation based on any forward looking market expectation. The forward looking expectation can be derived from economics analysis, fundamental analysis, price trends or other means.

Michael Kitces and I took opposites sides in the market timing versus tactical asset allocation debate during a recent interview published in CFA Magazine.  Michael is a respected financial planner and publisher who adamantly believes that tactical asset allocation is not market timing. He differentiates the two by the size of the allocation change and the duration of the move.

“The stereotypical market timer moves in or all out of investments at their whim…Tactical asset allocation typically implements changes in a far more modest fashion, typically in the 2-5% range, which 10-20% as the outer limit…[and] have a much longer time horizon, spanning months or even years.”

So, what is the breakpoint? Is it 2 or 5%, 10 or 20%, months or years? As long as you’re not making a big allocation change then it’s tactical and not timing? In other words, you’re saying that when you’re only a little bit pregnant, you’re not really pregnant.

The problem with tactical asset allocation is that it looks, sounds, smells, tastes, acts and feels so much like market timing that calling it anything but market timing becomes an issue in itself. Like Michael, advisers who practice the art of market guessing spend an inordinate amount of time trying to redefine what they’re doing rather than just calling it what it is – market timing.

Other common names for market timing include opportunistic investing, sector rotation, active asset allocation, top-down allocation, bottom-up allocation, global modeling, algorithmic positioning, defensive investing, and the list goes on. New wrapping paper is used every year but the fruitcake never changes.

This debate is important because more advisers are using market timing strategies. A 2011 survey by Cerulli Associates found that 61 percent of advisers are now using some type of timing in portfolio management. That’s up over 8 percent from 2010. Unfortunately, advisers remain notoriously bad at market timing according to CXO Advisory Group’s Guru Grades. Quality does not correlate with quantity.

I haven’t yet said how I feel about market timing. Well, here’s the way I look at it. I’d rather be certain of a good return than hopeful of a great one. If you play with fire, you’re going to get burned.