You have to develop the discipline to stick with that market timer through the inevitable periods in which you will be a below-average performer.... So the issue isn’t whether stock market timing can be successful, but—instead—having to endure significant periods along the way of below-average performance. The likelihood of having to do that is quite high, as it turns out. And it also appears that you need to be more prepared for this when following a market timer than when following a stock or fund picker.In other words, while some timers did turn in market-beating results (depending on the period measured), there were lengthy periods of under-performance in the process. Let's look at the recent 10-year performance of the four timing portfolios on his Honor Roll:
- 2004-2013 Newsletter A +8.0% Newsletter B +8.0% Newsletter C +11.3% Newsletter D +7.0% Wilshire 5000 +8.0% SMI Upgrading +9.4%
Two observations. First, three of the four merely matched or underperformed the market. This period contained most of the great bull market of 2002-2007 as well as the devastating bear market of 2007-2009 and the subsequent recovery. Thus, you had a large up move, a large down move, and a second large up move.
The fact that three Honor Roll timing newsletters couldn't easily beat the market suggests either they were late getting aboard the two bull markets or late getting out ahead of the bear. This led to the "significant periods along the way of below-average performance" to which Hulbert alluded. The second observation, as you might expect, is that Upgrading—with no market-timing efforts—easily outperformed three of the four. As Hulbert pointed out, it "appears that you need to be more prepared for (periods of underperformance) when following a market timer than when following a...fund picker." Nevertheless, Newsletter C beat the odds... I take my hat off to the editors for that impressive +11.3% annual performance.
But that's not all of the story. What if we added another five-years to the comparison, reaching back to the beginning of 1999 so as to include the bubble-bursting bear market of 2000-2002? One would expect that would play to the strengths of the market timers because it offers another opportunity to sidestep a major selloff. Here are the annualized results for the 15-year period (excluding Newsletter D which wasn't around in 1999):
- 1999-2013 Newsletter A +7.4% Newsletter B +8.6% Newsletter C +7.8% Wilshire 5000 +5.4% SMI Upgrading +9.9%
Two more observations. First, while the timers had difficulty beating the market for the 10-year period, throwing an extra bear market into the mix helped. Over the 15-years, all three Honor Roll timers trounced the market (I'm left to wonder how the non-Honor Roll letters fared). However, Newsletter C, the star of the earlier comparison, faltered in this one. This is an illustration of the difficulty of consistently calling the correct timing moves over time.
And second, even with the additional bear market, Upgrading's buy-and-hold-through-it-all approach dramatically beat the market as well as handily outdistanced the timers. While Upgrading won't always win in these comparisons on a quarterly or annual basis, it certainly has turned in superior returns for the long-term investor.