Timing the Market

June 1, 2014

Investment Newsletter for the end of May, 2014

I have said to all of you and to anyone else who will listen that it is impossible to time the market.  But what does timing the market mean?

There are two kinds of timing.  The first tries to determine the right moment to buy or sell a particular stock.  The “expert” based on investment news, company reports, insight, etc. decides on the right time to trade.  This type of timing is based on fundamental data.  The trades may happen every month or perhaps every few years.  The problem is that all that news is old before the expert ever sees it.  It is old news when the talking heads on TV mention it.

It is old news when it is first published anywhere.  The market instantly reflects all news and all insights in its pricing.  I am not saying the market price is always right.  I believe there are bubbles and fear storms.  Almost always, however, the market is right.  To say the market is wrong is pure emotion.

The second kind of timing is based on charts.  It is called technical trading.  The “expert” based on 52 week high/low records, trend lines, head and shoulder graphs, etc. determines when to trade.  Every economist since before I was born says technical trading is nonsense.  These charts mean nothing as to the future.  It does, however, generate a lot of trading commissions.  The typical technical traded account may transact up to 25 or more times per day.  I once completed a tax return that had 3,000 stock trades.  Often the positions were held for only a few days.  The market was slightly up that year.  The client lost money.  The broker made a big profit.

We all have a tendency to think the market is at a high; let’s get out.  Or a low; let’s get in.  If you act on that impulse, that is timing the market.  It is an emotional response.  Predicting when the market will move is not possible.  We all know the market will go down.  Perhaps tomorrow, perhaps two years from now.   I have been thinking the market is at a high for six months.  If I acted and sold your accounts, you would have missed several hundred points of continued gains.  It is still climbing.

I trade based on the original allocations.  As soon the actual deviates from the allocation enough to justify a trading commission, I order a transaction.  I trade only to rebalance the portfolio to the original allocations.  I am not trying to time the market and I am trying to eliminate the emotional part of the decision.

Most deviations from actual to allocation are small.  A mutual fund commission even at a discount house like Schwab can be up to almost $50.00.  A $1,000 trade is not going to generate enough advantage to overcome two commissions, one to sell and another to buy (commission here would be $32 each way).  As a rule of thumb, I want trades to be at least $5,000 and often more.   You have noticed that I do not trade often.  I am reviewing all accounts right now and will be rebalancing in the next day or two.  However, many accounts will have no trades.  If the benefit is not higher than the cost, then I do not trade.

Thank-you for your business and trust.  I am reachable at any time if you have questions or concerns.

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