Here’s something that oughta give the marketing wizards at traditional Wall Street firms a heart attack: Timing beats buy and hold, according to a study by  finance professors at the New York University Stern School of Business.

I doubt its pure timing — my best guess is, the fund managers involved more likely used aggressive risk management tools and capital preservation strategies. To the unknowing, these look like timing but are not.

The profs found that fund managers who invest based on macroeconomic trends — and are willing to adjust their portfolios as those trends change — are the managers most likely to add value for investors.

How you define “macroeconomic trend changes” and the basis of portfolio adjustments is a key factor — one that is not delineated all that clearly:

“By analyzing data from January 1980 through December 2005, the study identified the top 25% of actively managed equity mutual funds based on their ability to select stocks during expansionary economic periods. The report noted that this same group showed proficiency at market timing during recessions as well.

This group outperformed other funds in both risk-adjusted terms and after expenses, according to the study.”

Cash has beaten stocks for the past 10 years; Even worse, Bonds have beaten Stocks since 1966. To me, this suggests that an active asset allocation program (rather than pure market timing) is the way to go for most high net worth investors.

Despite the weak stock performance, expect massive pushback on this from the long-only, fully-invested, fee-based actors on the street.

Already, we see critiques from Morningstar. Russel Kinnel, the director of mutual fund research, carped that “the 1980s were littered with funds that blew up because managers tried to follow macroeconomic trends.”

The Street will this line of thought tooth and nail, but given the horrific performance if the LOFIFB firms, they have their work cut out for them . . .

>

Source:
Market timing trumps buy-and-hold strategies during market swings, says NYU study
Investment News, David Hoffman
November 10, 2009

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20091110/FREE/911109978

Category: Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

34 Responses to “NYU: Market Timing Bests Buy & Hold”

  1. To repeat:

    Cash has beaten stocks for the past 10 years;
    Bonds have beaten Stocks since 1966.

  2. rj says:

    Despite the weak stock performance, expect massive pushback on this from the long-only, fully-invested, fee-based actors on the street.

    Well you already gave the opening that those people will pushback on:

    How you define “macroeconomic trend changes” and the basis of portfolio adjustments is a key factor — one that is not delineated all that clearly.

    In my personal job, I find if you don’t have the data to back up your theories, they don’t mean anything and people will hammer you on it. Economics is a bit of a special case because there is little that is 100% unchallenged fact, but that means in order to present a theory you have to be extra-vigilant in backing up what you believe and cannot leave openings.

  3. Marcus Aurelius says:

    Companies are using investment dollars as revenue/income – not capital. You do not, and have not for quite some time, “invested” in stocks. You give these companies your money.

  4. danm says:

    Of course market timing beats buy and hold… if you do it properly! lol

    Just like GOOD value managers, GOOD growth managers, GOOD core managers can do better…

    Don’t have to be a rocket scientist to deduce that.

  5. danm says:

    The problem is that 100% of investors are looking to do better than the market. And government is telling them that they should be entitled to that for their retirement.

    Our system is a farce… one day the delusion will dissipate.

  6. HCF says:

    @danm:
    > The problem is that 100% of investors are looking to do better than the market

    It’s like the old saying goes: “If you don’t know who the sucker is, then it’s probably you!” SOMEONE always has to be the loser, which is what most ppl, unfortunately, are too ignorant to notice…

    HCF

  7. tsk tsk says:

    Barry-
    You call it ‘active market allocation’ but other brokers call it ‘churning. ‘ [BR: Churning is where borkers charge a commission ofr4 moving in and out; asset allocators are fee based]

    Don’t ever lose sight of the concept that Buy and Hold and Dollar Cost Averaging is an easy to understand by both brokers and clients. And more important to firms is that Buy and Hold generally meets industry suitability standard strategy for most investors. I doubt most brokers could explain why they lost grandmas life savings ‘actively allocating’ during their FINRA arbitration. If the auditors say its churning, it is. Whether or not you made money while ‘actively allocating’ for your client is irrelevant.

    damn-
    Investors should be trying to do better than inflation, not the market, imo.

  8. danm says:

    tsk tsk:

    I agree but could you imagine how different the world would be today if everyone had been fed that piece of advice 30 years ago?

  9. DeDude says:

    So the “top 25% of actively managed” funds did great. How about the bottom 25% %? and how do I today figure out who will be in the top 25% for the next decades. It would be absolutely shocking if those that do best at active management did not beat the bye and hold – normal distributions dictate that.

  10. rj says:

    So the “top 25% of actively managed” funds did great. How about the bottom 25% %? and how do I today figure out who will be in the top 25% for the next decades.

    Good point. So really for past performance we should be comparing the median funds of each strategy: the average-performing “buy and hold” versus the average-performing “market timing”.

  11. DeDude says:

    The shocker is something Berry pointed out some time ago: the average managed fund does worse than the index funds. So all these professional full time investment specialists are no better than flip-of-a-coin investment strategies. Managers were supposed to be able to suck money from the retail investor because their experience and knowledge gives them an advantage (and outperform stock averages). Instead GS and the other banksters suck money both from them and from retail tards, by front-runing. What a beautiful reverse Robin Hood system those Wall Street criminals have created. Who was the idiot that said soci@lsm is worse than this?

    BERRY I though you were going to fix the problem with the S-word !!!

  12. Bruce in Tn says:

    Not only does market timing work, it is the only rational idea in the equities universe. Period.

    Not only that, but in timing the market, it has always worked for me in my younger, poorer days to tailor my portfolio and NOT be diversified. I don’t give a damn what Cramer says, you pick the best ideas and stick with them. Diversification means you aren’t paying attention….

    These two things have made an enormous difference in my financial life.

    B in T

  13. This is close (about trading and timing) but a little off topic. I was thinking of a great way to get a good market sentiment indicator would be to get all the words and poster comments together of the top 25 business blogs out there. Then you run them through word cloud software. You would probably come up with some great trends and also sentiment

    Poster comments are important to the mix because it offers great counterpoint. Take for example the debate between Barry and this board over GS compensation. Barry saw it one way and posted articles and his comments in that direction but with the negative sentiment of the posters it added great balance to the point

  14. WorldBeta says:

    It’s really doubtful you’re going to find mutual fund managers with the ability to time the market. Even if you do, individuals will never ever identify them ahead of time (check out the DALBAR studies). They don’t even keep up with inflation, and that is pre-tax.

    But, if it is a simple system for market timing you are after, we wrote a paper in ’06 that avoided the market collapse effectively: “A Quant Approach to Tactical Asset Allocation”

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

  15. danm says:

    I’ve used market timing many times and it works great if you are right. That’s the key!

    When I switched jobs in 1999, my pension fund assets got transfered in the beginning of 2000. I left it in money market waiting for Nortel to collapse. Portfolio managers were sending out letters to clients asking them to grant them a special exemption for Nortel… so they could go over the 10% limit, forgetting the very reason why limits were there in the 1st place. I knew we were in bubble mode. Then I went into bonds. And went back diversified a couple of years later.

    Somewhere around the end of 96, early 97, I got out of the stock market and went into treasuries, 5 years and less. I told myself that when the bubble burst everyone would come running to Mr. Government.

    I might not make huge returns but I can ALWAYS sleep at night. I’ve never had a negative year and I can actually do other stuff during the day without checking the stock tickers.

  16. Bruce in Tn says:

    I will tell you guys how important market timing and concentration are for me. In September of 1998 I have become tired of my returns though a good mutual fund company that had my Keogh. I used to watch my daughter’s high school soccer practice late in the afternoon, and one of the dads that I was friends with did the same with his daughter. I told him that I was transfering all my Keogh funds to Schwab and would self-direct them and was planning to go 100% in tech. We both did. I invested 100% of my retirement in 3 stocks and 1 mutual fund. I listened to Greenspan, “irrational exuberance” and left the market in April, 2000. I have invested heavily only one other time, from March to November of 2003, with a much different stock idea than techs. I have essentially been out of the stock market since. In that time 26 or so months of concentrated stock ideas- and CD’s otherwise, my portfolio of that Keogh is up 701% since October 1998. 400% was in 18 months from October 1998 to April 2000.

    I realize the tech bubble was moment in the universe where the laws of physics were repealed. Nonetheless this is a true story, and I have no financial training…but I do think of investing and paying attention as my hobby in the salt mine. I have a little GDX and FXA here, but I don’t have to take chances anymore, so I don’t. If I think inflation is returning, I will aggressively invest to protect the value of my investments, however.

    Market timing.
    Concentration.
    Spend less than I make.

    that’s all I did/do for investment….

    B in T

  17. danm says:

    Somewhere around the end of 96, early 97
    ——-
    I’m so stuck in the 90s! I meant ’06, ’07

  18. gorobei says:

    This is not shocking. Equities have always been a hideous product: a mix of ownership, discretionary cashflows, and voting rights. In the old days, that made them worth trading if you were an expert, and you even got superior returns because they were so ugly. Today, with broad retail participation, they are a recipe for randomness and risk.

    Think about this: if equities didn’t exist today, and some bank proposed them as a new product, that bank would be laughed out of the room.

  19. danm says:

    And another issue that rarely gets mentioned is timing of your investment dollars.

    For example, the majority of my bonuses have coincided with stock market peaks. If I had invested these in the market as soon as they got deposited into my account, I wouldn’t have much left today.

    They can tell me anything but IMO, timing is the most important part of the game.

  20. Somewhere around the end of 96, early 97
    ——-
    I’m so stuck in the 90s! I meant ‘06, ‘07

    You notice no one called you on it Dan. That is because, ironically, your example would have worked in both decades :)

  21. Niskyboy says:

    “I doubt its pure timing — my best guess is, the fund managers involved more likely used aggressive risk management tools and capital preservation strategies. ” Yeah, well, let’s not overlook the huge role of advance non-public information from people in the know who are trying to curry favor with a fund manager. So if an analyst tells a fund manager he’s about to publish an unexpectedly favorable report on a company next week, and the fund manager uses that as the catalyst for an entry point today, we’re supposed to consider that to be market timing, nothing more? Theyt’re insulting our intelligence. It’s obviously more akin to insider informaiton. Whether it is in fact insider info or not, it happens all the time — you know it, I know it, everybody knows it except NYU, apparently. In one of the Market Wizards books an analyst is quoted anonymously as saying, “Whenever I have news, I call Stevie first.” That would be Steve Cohen of hedge fund SAC Capital. Do you think such calls might have just a teenie weenie bit to do with his results, hmm?

  22. PhilD34 says:

    Regarding Cash and Bond beating Stocks…

    “Cash has beaten stocks for the past 10 years; Even worse, Bonds have beaten Stocks since 1966.”

    Nominal or real?

    ~~~

    BR: What does it matter if you are comparing two asset classes over time? If you adjust both for inflation, it makes no difference to the relative performance . . .

  23. wally says:

    The issue here is just as DeDude says – you cannot tell who will be the top 25% in advance. There will ALWAYS be 1/4 of investors in the top 25%, no matter what their performance.
    This is like the longstanding debate: is Warren Buffett a genius or just the random statistical outlier ? (the last 11 years have answered that question… see BR’s comments above about cash beating stocks… it beat Buffett, too).

    There is no magic or mathematical rule that will always get profits and the reason is simple: this is a human game and the rules always change. As soon as somebody finds a shortcut, somebody else catches on and finds a way to shortcut the shortcut.

  24. [...] Active asset allocation beats buy -and-hold.  (Big Picture) [...]

  25. MorticiaA says:

    I’ve downloaded the research paper b/c I’m extremely interested in the findings. However, as I expected, the researchers don’t name names in who the top 25% were in their research. Darn those academicians.

    As for Morningstar — that’s precisely the response I would expect from them. I appreciate MS for it’s data-compiling abilities, but as for analysis… I’ve begun to consider them the George Costanza’s of investments: do the opposite of what Morningstar says and I’ll come out ahead.

  26. MorticiaA,

    it’s a good point re: Morningstar..for all the hue & cry during ‘The Financial Crises’, NRSRO ‘Ratings Agencies’ are spoken of, but not Morningstar..

    BR,

    Sounds like a good time to offer a vehicle, to People, so they can ‘buy’m by the box’..

    i.e. FusionIQ powered Mutual Fund/ Investment Trust
    ~~~
    “…but over the past 20 years you would have been far better off investing in the provider than the service. Over the last decade, for instance, T Rowe Price (TROW) the stock has returned an average of 12% per year as of 1/31/08. The Vanguard 500 Index fund (VFINX), by contrast, has returned barely 4% per year over that time period, and it was in the top half of all large-cap stock mutual funds. The T Rowe Price example isn’t an anomaly, however. Over the decade ending December 31, 2006, the returns of the largest and most established mutual fund companies have routinely beaten the returns of their fund offerings by a factor of 2 or even 3…”
    http://amateurassetallocator.com/2008/03/18/mutual-fund-companies-make-better-investments-than-the-funds-they-manage/

  27. [...] as to the benefits (or not) of a buy-and-hold investment methodology.  Barry Ritholtz at the Big Picture highlights some recent research showing that some portfolio managers are able to exploit [...]

  28. DeDude says:

    The stock marked of the past 3 decades is a ponzi scheme that would make Madoff blush. The CEO and Banksters, stuff the boards with friends that will look the other way (as long as they are in on the scam). Then the companies borrow cheep money from their friends (who gets it directly or indirectly from the fed). That money is then used to buy back stocks so it looks to the investors like the company is a success. Investors then buy stocks in these ever growing success story companies, and the insiders can harvest huge bonuses and stock options. Just like the credit fulled GDP growth of the last decade, it all works great as long as credit is flowing freely. Did I hear somewhere that corporations are having a hard time getting credit, uh-ohhhh.

  29. [...] Ritholtz over at my favorite blog The Big Picture picked up on an interesting study by NYU: [F]und managers who invest based on macroeconomic trends [...]

  30. DiggidyDan says:

    I doubt it would give them a heart attack, when you consider that most firms make big bucks from transaction fees. Convincing the majority to try and time the market would probably make them a lot of money from just moving it around all the time. (and probably make the majority a lot poorer) The heart attack would be if everyone just decided the market is a sham in general and stuck their dollars in the mattress or tips or cds, etc.

  31. DiggidyDude,

    do you mean, like this: “…Market Dilution via Endemic Corruption and Fraud
    Definition: Dilution: A thinned or weakened state.

    It seems like Matt Taibi’s recent article in the Rolling Stone has reminded everyone that we still have a problem with ‘naked shorting’ with the SEC being the biggest joke in town. Jim Puplava did a great Crime of the Century series of interviews last year with the likes of Bud Burrell and Patrick Byrne.

    I would advise anyone who missed them to give them a listen to get just an inkling of the systemic corruption that pervades the markets. Bud Burrell, a very sharp guy, believes there is one naked counterfeit share for every legitimate share in the US markets. You may want to read that last sentence again. Scary indeed! Even with all the will in the world, the SEC would be farting in the wind against such endemic larceny.

    Markopolos summed up the financial mafia succinctly enough during the Madoff Testimony:

    “Government has coddled, accepted, and ignored white collar crime for too long. It is time the nation woke up and realized that it’s not the armed robbers or drug dealers who cause the most economic harm, it’s the white collar criminals living in the most expensive homes who have the most impressive resumes who harm us the most. They steal our pensions, bankrupt our companies, and destroy thousands of jobs, ruining countless lives.” Harry Markopolos in Congressional Testimony …”
    http://www.financialsense.com/fsu/editorials/2009/1103.html

  32. [...] Yesterday, we discussed the NYU paper on how Market Timing beat Buy & Hold over the past few decades. [...]

  33. [...] as to the benefits (or not) of a buy-and-hold investment methodology.  Barry Ritholtz at the Big Picture highlights some recent research showing that some portfolio managers are able to exploit [...]

  34. [...] Barry Ritholz’s The Big Picture:  NYU:  Market Timing Bests Buy & Hold.  He goes on to point out that it’s likely the managers who bested buy and hold were using [...]