Market Timing
“The investor’s chief problem - and even his
worst enemy - is likely to be himself”
- Benjamin Graham -

“Market Timing: Opportunities and Risks”
by Wim Antoons

Agenda
1. What is Market Timing?
2. Market Timing: Risks and Opportunities
3. Evidence about Market Timing
4. Conclusions

1. What is Market Timing?
• Every portfolio construction starts wit the determination of your
Strategic Asset Allocation (SAA).
• Purpose of Tactical Asset Allocation (TAA) is to increase returns.
Deviation from SAA.
• Market Timing is more specific: moving in or out of cash.

Determination of Variance in Portfolio

2. Risks and Opportunities
• Opportunity
• Avoiding fixed income or equity crash market.
• Risks
• Missing part of Bull Market.
• Increase in Taxes and Costs.
• False Trading Signals.

2. Opportunity of Market Timing and Asset Allocation
1 Dollar invested each year with perfect foresight from 1926 to 2016 in:
• Treasury Bills (30 days)
• Long term government bonds (20 years)
• S&P 500 Index
• Best Asset Class
Exhibit 1: Endcapital of 1 USD invested (1926 - 2016) for Inflation
Inflation $13,5
Cash (30 Days T Bills) $20,7
Bonds (20 Yr Govies) $134,5
Stocks (S&P500 Index) $6 071,8
Best Asset Class $4 125 634,8
Source: Ibbotson & Ass. (www.martincapital.com)

The 25 Days « Myth »

Buy and Hold versus missing volatile Days
The Results of Market Timing on S&P500 index
USD 01/1961 - 12/2016 (14.096 trading days)
% p.a. Endcapital 100 $
Missing 25 best days 5,88% 911
Missing 25 worst days 15,24% 23 973
Buy-and-hold 9,94% 3 889
Missing worst/best days 10,99% 5 614

Good and bad Days tend to cluster
19/10/1987 -20,47% 13/10/2008 11,58%
15/10/2008 -9,03% 28/10/2008 10,79%
1/12/2008 -8,93% 21/10/1987 9,10%
29/09/2008 -8,79% 23/03/2009 7,08%
26/10/1987 -8,28% 13/11/2008 6,92%
9/10/2008 -7,62% 24/11/2008 6,47%
27/10/1997 -6,87% 10/03/2009 6,37%
31/08/1998 -6,80% 21/11/2008 6,32%
8/01/1988 -6,77% 24/07/2002 5,73%
20/11/2008 -6,71% 30/09/2008 5,42%
28/05/1962 -6,68% 29/07/2002 5,41%
8/08/2011 -6,66% 20/10/1987 5,33%
13/10/1989 -6,13% 16/12/2008 5,14%
19/11/2008 -6,12% 28/10/1997 5,12%
22/10/2008 -6,10% 8/09/1998 5,09%
14/04/2000 -5,83% 27/05/1970 5,02%
7/10/2008 -5,74% 3/01/2001 5,01%
20/01/2009 -5,28% 29/10/1987 4,93%
5/11/2008 -5,27% 20/10/2008 4,77%
12/11/2008 -5,19% 16/03/2000 4,76%
16/10/1987 -5,16% 17/08/1982 4,76%
6/11/2008 -5,03% 9/08/2011 4,74%
17/09/2001 -4,92% 15/10/2002 4,73%
10/02/2009 -4,91% 29/05/1962 4,65%
11/09/1986 -4,81% 11/08/2011 4,63%
Worst 25 trading days Best 25 trading days
S&P 500 Index Returns 01/61 - 12/2016. Best / Worst
Trading Days (14.096 Observations)

Periods of higher volatility begin mostly
with a correction
28/05/1962 -6,68% 29/09/2008 -8,79%
29/05/1962 4,65% 30/09/2008 5,42%
27/05/1970 5,02% 7/10/2008 -5,74%
17/08/1982 4,76% 9/10/2008 -7,62%
11/09/1986 -4,81% 13/10/2008 11,58%
16/10/1987 -5,16% 15/10/2008 -9,03%
19/10/1987 -20,47% 20/10/2008 4,77%
20/10/1987 5,33% 22/10/2008 -6,10%
21/10/1987 9,10% 28/10/2008 10,79%
26/10/1987 -8,28% 5/11/2008 -5,27%
29/10/1987 4,93% 6/11/2008 -5,03%
8/01/1988 -6,77% 12/11/2008 -5,19%
13/10/1989 -6,13% 13/11/2008 6,92%
27/10/1997 -6,87% 19/11/2008 -6,12%
28/10/1997 5,12% 20/11/2008 -6,71%
31/08/1998 -6,80% 21/11/2008 6,32%
8/09/1998 5,09% 24/11/2008 6,47%
16/03/2000 4,76% 1/12/2008 -8,93%
14/04/2000 -5,83% 16/12/2008 5,14%
3/01/2001 5,01% 20/01/2009 -5,28%
17/09/2001 -4,92% 10/02/2009 -4,91%
24/07/2002 5,73% 10/03/2009 6,37%
29/07/2002 5,41% 23/03/2009 7,08%
15/10/2002 4,73% 8/08/2011 -6,66%
9/08/2011 4,74%
11/08/2011 4,63%

Most underperformance is generated in severe bear
markets!
www.dalbar.com Quantitative Analysis of Investor Behavior

Most of the time the stock market just fluctuates
• Being invested in the best 81 trading days (out of 14,096
equals a buy-and-hold return of 56 years
What will the stock market do? « It will fluctuate » - Ben Graham
Time Invested End Capital 100 USD Return p.a. Time Invested
Buy & Hold 3888,9 9,94% 100,00%
Missing 25 best days 910,6 5,89% 0,18%
Missing 50 best days 302,5 2,96% 0,35%
Missing 81 best days 101,3 0,03% 0,57%

Risks in trying to time the Market
1. Taxes and Costs do lower your returns.
2. Opportunity Costs: missing part of the bull.
3. False Trading Signals.
“The greatest enemy of a good plan is the dream of a perfect plan”
- Prussian General Karl von Clausewitz

Costs and Taxes do lower returns

False trading Signals

3. Evidence against Market Timing
1. Advice from Newsletters
2. Cash Levels in Funds
3. Guru Advice
4. Rich Persons
5. Fund Flows of Individual Investors
6. Investor Returns versus Fund Returns (DALBAR Study)

3.1. Market Timing Advice from Newsletters
• Analyzing MT advices (over 15000) of 237 Newsletters in US (06
1980 – 12 1992), Graham & Campbell found that 77% of the advices
were wrong.
– Less than 35% achieve returns beyond buy-and-hold.
– Only 48% calls to increase equity weight at the start of a bull market
– Only 51% calls to decrease equity weight before equity market decreases.

3.2 Cash Levels in Mutual Funds

3.3. Advice from guru’s (6.582 predictions): 47% correct
(cxoadvisory)

3.4. No single Person made his fortune by timing the market
• Investment Philosophies of some wealthy Investors:
• Activist approach: Carl Ican
• Value Manager: Warren Buffett
• Top down Macro calls: John Templeton
• Hedge Fund Manager: Julian Robertson
• Wonderful Company: Bill Gates
• Market Timers: ?

3.5 ICI & MSCI: Herding Flows follow Returns
22
Highest inflows
Highest outflows

3.6. Underperformance of Individual Investors on 20 year
Investment Period
www.dalbar.com Quantitative Analysis of Investor Behavior

www.nagelmackers.be
4. Conclusions
• Low interest rate environment
• Don’t forecast direction of market
• Wrong market calls can wipe out your savings

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Q & A