Does Timing Market Only Work for Pros?

08/12/2011 0 comments

Wall street Journal recently published an article Timing the Market Works for Some Pros but Is Risky for Average Joe. In the article, the author made the following observations:

  • About two-thirds of advisers said they planned to use it (tactical management) more often, based on a survey this spring by insurance company Jefferson National. 
  • Before the recent market fallout, some advisors wisely lightened up stock exposure, should average investors follow?
  • The tactic is risky, especially for armchair investors, and many institutions and advisers are cautioning their clients against making any big changes in their portfolios. (emphasis is ours).

We agree with the assertion that for armchair or undisciplined investors, tactical management is risky as very often, these investors will manage their portfolios inconsistently. For example, considering right now, if an investor liquidate their stock exposure and then forget about it (this indeed occur very often as many of them are already frightened and some of them will never come back to the market), it would be very detrimental to their retirement investment portfolios. If these investors hold on their stocks, stock ETFs or mutual funds, they might suffer from big loss, especially for those who are over exposed to risk assets. 

The problem with tactical asset allocation is not it does not work. In fact, it works very well up till now. Many of our tactical portfolios have either lightened up risk asset exposures or switched to some other assets which are still holding relatively well (such as commodities). They have incurred less loss or even positive year to date. The problem is that it requires consistency (20-30 minutes a month, for example). For those who are willing to look after their portfolios once a month or even once a quarter, tactical asset allocation strategy can be very helpful to safe guard your hard earned investments.

For 'armchair' investors, the best bet is a diversified portfolio that requires quarterly or even annual re-balance. Strategic asset allocation portfolios are the ones they should pursue. 

As of 8/11/2011, here is the performance comparison for two portfolios: 

 

Portfolio Performance Comparison

Portfolio/Fund Name YTD1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
SPY -5.87% 10% 58% -1% 2% 0% -2%
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 0.01% 10% 79% 9% 71% 12% 88%
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation Moderate 0.7% 11% 96% 5% 26% 7% 35%
EFA -7.5% 6% 6% -5% -12% -2% -11%

Five Year Chart

MyPlanIQ Diversified Core Allocation ETF Plan consists of 70 funds. These funds enable participants to gain exposure to 6 major assets: US Equity, Commodity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.

Symbols: SPX, COMP, SPY, EFA, EEM, VTI, IYR, ICF, AGG, DBC, GLD, Retirement Investing, Asset Allocation



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