Stock Market Timing vs Buy and Hold

There is a lot of talk these days about what makes more sense, a buy and hold investment strategy or stock market timing strategy?

Considering the stock market performance over the past ten years, I think the discussion is perfectly reasonable. How smart is it to buy something and forget about it. Is it reasonable to think we can predict what the market, a industry, or a business will look like in ten or twenty years. I think most people, when pressed to really think about it, would realize the absurdity of trying to predict what will happen to a stock in ten years. If you don’t believe me ask anyone who was holding Enron, Worldcom, Fannie Mae, GM, Citigroup or even GE long term.

Wikipedia defines market timing as “the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.” One of the primary differences between buy and hold and a market timing strategy is the time frame we are trying to predict. A buy and hold strategy by its definition has a much longer time frame than a market timing strategy typically would. A market timing strategy, makes its buy and sell decisions based on changes in the underlying technical indicators or the fundamentals of the market. The time frame of a market timing call based on technical analysis would rarely try to predict what the market is going to do much more than a year out. The farther out we try to predict, the less reliable the prediction. For example it would be relatively easy to predict that a team that makes the NBA finals one year would make the playoff the following year. If you tried to predict who would make the playoffs in ten years, your prediction would probably not be as reliable.

I believe that trying to call the tops and bottoms in the stock market is something best left to day traders and Wall Street professionals. So what about the rest of us? Those of us that would like to retire comfortably without being exposed to market gyrations we have witnessed in the last year. In upcoming post I will be introducing you to market timing models that will help you get better risk adjusted returns than a buy and hold strategy. I hope to do this in a fashion that will not require you to be glued to the markets every move. Most people do not have the time or the inclination to watch the market on a daily basis. That is where I plan to fill the gap by letting you live your life while I keep you updated on changes in the market that require your attention.

Even though I do not try to predict market tops and bottoms, I find myself placed in the realm of market timers. What I do try to do is find times when the risk of being in the market is high and reducing my exposure or tightening my stops. I also look for times when based on historical precedent risk is low and exposure to the market should be increased. I do not want to fight the trend or predict a change in trend. So it is with a certain amount of discomfort that I will sometimes refer to myself as a market timer.

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