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Market Timing & Net Worth

Don’t worry, this post is not about why market timing is not possible, and should not be indulged into. In fact, I feel a bit of it should be done as it gives a feeling that one is “doing something” and is “in control”. We will agree all humans love the feeling of being “in control”.

Nor it is about detailed number work on how much impact a successful market timing can have on one’s portfolio / net worth. The works have already been done already here in detail and we will rely on it for good measure.    

First – let me quote from above article on the quantum of impact perfect market timing may have on portfolios:

 

 

“The evidence, based on more than 160,000 daily returns from 15 international equity markets, is clear: Outliers have a massive impact on long-term performance. On average across all 15 markets:

-        missing the best 10 days resulted in portfolios 50.8% less valuable than a passive investment; and,

-          avoiding the worst 10 days resulted in portfolios 150.4% more valuable than a passive investment”

 

 

So, we will agree that if one is able to time it successfully, the impact on net worth can be huge. That said, in the same paper, the author also warns

 

“Given that 10 days represent, in the average market, less than 0.1% of the days considered, the odds against successful market timing are staggering.”

 

 

 

Essentially, what the author is saying - market timing is well nigh next to impossible. We’ve heard this before and data here definitely proves the point. Though the fact remains that black swan events, however rare, do have huge impacts, both positive and negative. Can expect few to hit in one’s lifetime and impact equity market returns, even in long term such as a decade. If fact, in Indian context my study of Nifty 500 TRI 10 year rolling return data shows nearly 4% of times Nifty 500 returns have ranged between 0% to 8%, annualized. That’s black swan events playing out!!!

BUT, most of us, me included will not give up on market timing. We all are optimists and hope, rather are sure we can do better at market timing.

For me, if I do indulge in market timing, I would probably do it to take advantage of worst case market situations arising out of black swan events and raise my equity allocation, however difficult that maybe. And I would base my decision such events playing out on what happens to market returns in decades and not days. Here’s what I would do:

-          Say on a portfolio basis, I want to be an aggressive equity investor and would like to go with a 75% equity and 25% debt (bond) allocation

-          First as an insurance for my failure as market timer, I would maintain a portfolio with a certain minimum equity allocation. Let’s say I will always stay invested @ 50% in equity index funds. Balance 25% of my capital would stay in cash equivalents. Don’t forget, this 50% allocation is way above minimum equity allocation of 25% suggested by Benjamin Graham in his book “The Intelligent Investor”. In fact, even in a radical portfolio suggested by US investor Harry Browne in his book “Fail Safe Investing”, equity allocation is capped at 25%, which can go upto 35% until rebalancing should definitely be done)

-          Next, I would establish some benchmark / standards of “market crash” attributed to some black swan events. Now this is a tricky area and would require another full blog to do justice to this topic. Though this earlier blog will give a hint on how to establish such benchmark  

 

Coming back to quantum of impact on net worth or portfolio performance of any market timing SOP: As I said before, I will not do any detailed numberwork in this post. Consider all above as my market timing rant. As the author says in the end of the article quoted above:

“Much like going to Vegas, market timing may be an entertaining pastime, but not a good way to make money”

 

However, there is no denying the possibility that if one follows equity allocation SOP as suggested in this blog,  it can help one tide over severe market downturns, especially if they hit early on during one’s equity investment journey. That definitely will have a significant positive impact on one’s net worth by way of enhancing “staying power” and confidence in deploying large amounts in “risky” equity investments.


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