Realize the Importance of Market Timing

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Physician's Money Digest, May 15 2003, Volume 10, Issue 9

Many investors will tell you that markettiming is a risky investment strategy.These are probably the same investorswho lost all of their 1990's gains. Regardless ofwhat these investors say, market timing is a goodthing. It forces an investor to a cash position whenthe market begins to correct. In fact,many market timers have been able toavoid much, if not all, of the bear marketover the past 3 years.

ADVANTAGES OF TIME

The current market continues toshow signs of similarity to the earlyphases of the trading-range market ofthe past. From February 1966 toAugust 1982, the market was downover 15%. During this period, if aninvestor had a broadly diversified (ie,buy-and-hold) portfolio, the gainswould have been nonexistent or mostlikely down for the past 16 years. Theappreciation would not have kept upwith the inflation rate.

During this same period, therewere 4 times when the market gained over 30%,and 2 years in which it gained over 60%. Byemploying a market-timing strategy, an investorcould have capitalized on these relatively short-termgains and created a long-term profit. That'sbecause market timing allows investors to capitalizeon intermediate moves in the market, whilehelping them avoid big losses.

Market timing is often misconstrued as a riskyguessing game. Investors who use this approach,however, don't employ guess tactics. They rely onmarket indicators. There are many indicators thatcan inform an investor of intermediate marketstrength or weakness. These indicators look stronglyat the trend of the overall market. (Before a personinvests in a stock or mutual fund, the generalmarket should be very healthy.) Some market-timingindicators include price-volume action, movingaverages, new highs, new lows, etc.

The key to market timing is recognizinga mistake and cutting the loss assoon as possible. Many investors areindoctrinated with a buy-and-hold strategy,which is a difficult habit to break. Asa market timer cuts losses through disciplinedrules, the buy-and-hold investoris willing to ride a stock from $100 tonearly $0. Investors are beginning torealize that brokerage buy-and-hold isnot where the money is made. In fact,the risk of riding a stock to $0 tremendouslyoutweighs the risk an investorincurs through the use of proven market-timing techniques.

CONVINCING EVIDENCE

Barron's

A recent article in illustratesthe ability of market timing to perform wonders ona portfolio. The article's author, JacquelineDoherty, describes the outcome of 3 different $1investments in the S&P 500. Doherty uses the marketperiod from September 1966 through October29, 2001, in her fiscal study. The results of thestudy are both interesting and surprising.

Doherty found that if $1 was invested in theS&P 500 in 1966, it would be worth $11.71 today.If $1 was invested and the best 5 days of each yearwere deducted, it would be worth only 15 cents.And if $1 was invested and the worst 5 days of eachyear were deducted, it would now be worth$987.12. Of course, an investor is not always goingto be able to time the market precisely. However,any sort of successful, proven market-timing strategycan make an incredible difference.

FUTURE POSSIBILITIES

If we are entering a long period of zero growthin our stock market, investors are going to need tofind some form of market timing. Even in this typeof market, there are ways to make large sums ofmoney. To do so, investors will need to be able topick their spots. That's where the market-timingstrategy lends a helpful hand. Market timinggauges the overall market strength, finds sectorleadership, and precisely finds those stocks that areoutperforming the overall market.

Physician-investors who feel uncomfortabletaking on this task alone or who are too busy withtheir medical practice to devote the time and attentionneeded to research potential stocks, may wantto hire a specialist or money manager. Specialistsand money managers understand trading ranges ofprice/earnings ratios and technical analysis (ie, thesupply and demand of a stock). Therefore, a disciplinedmoney manager is able to use technical andfundamental analysis to invest for you.

The outperformance of this type of intermediateinvesting for long-term profit can be preciselydescribed and explained in more detail. A soundexplanation can also help alleviate the pangsinvestors may feel transitioning from a buy-and-holdmarket approach to a market-timingapproach. Whether you consult your financial advisoror newly hired money manager for advice orreassurance, make sure you have a decent understandingof market timing before you proceed.

Michael Doran is a privatemoney manager affiliated with SierraCapital Planning in northern California.He runs a fee-based business and a hedgefund for qualified investors. For more information,call 877-467-8657 or visit www.sierrainvestor.com.Christopher Nezbeth contributedto this article.