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Active Management – Market Timing?

I’m asked periodically what I think of “market timing” or “active management” versus a straight buy and hold philosophy.

My first response is usually to ask for a definition of those terms. While it may be obvious to the person asking the question, if you ask 3 people you’ll get 3 different answers.

In this week’s video, I propose some definitions, but also share that while I think active management is preferable over your traditional buy & hold, market timing is great in theory but hard to execute in the real world.

Click to watch my video.


Good morning! Mike Brady with Generosity Wealth Management and today I want to talk about active management; and what’s the role of that, what’s the place in someone’s portfolio; and frankly can “timing” be done, and done successfully?

Let me just tell you that in a previous life, a different company that I was involved in the late 90’s and early 2000’s, we were known as the market timing firm. And we were extremely successful at that. And so, I know first-hand that market timing, with the right players and in the right environment, can be very successful. However, most people cannot market time on their own. And market timing, traditionally is meant to be when to go in and out of the market, whether it’s short term; meaning a day or two or a week or even longer term; month, quarter or year; going between stocks and bonds and cash, etc. whether that’s with mutual funds, etc. That’s kind of a traditional discussion of market timing. You know, I think that those that can successfully market time are very small. But I do believe it can be done it’s just very, very difficult. And it is extremely difficult for an individual investor to do it on their own, on their own portfolio. I use an example, whenever I need some legal work done, if I try to do it myself, I’m not going to be successful. Does that mean that legal work  is not successful? No. I have to go to a lawyer, someone who is trained and is unemotional about the particular problem or issue that I might have. But, as Mark Twain said, “A lawyer who represents himself has a fool for a client.” Well, what he’s really saying is a lawyer should not represent himself. So it’s very difficult when you’re emotional about an issue to handle it on your own. That’s why I think a professional adviser makes sense even if that person is doing some market timing.

I do allocations within sectors. And I’m usually almost always invested but I’m trying to weight, kind of tilt, one sector over another; whether it’s large cap, small cap, or mid-cap. What I don’t do is go 100% stock one day and 100% cash the next day, or even week by week. I think that that is a skill that is extremely hard to do and a lot of times it just isn’t very successful. I’m not sure that the environment today is the same environment that it was ten and twenty years ago.

Unfortunately, the statistics out there show that investors who try to time the market on their own are 20% less successful than if they had just done a “buy-and-hold.” (Source: Barry Mendelson, CIMA, CMC EResearch, “Dangers of Market Timing,” 4/29/2008.) And once investors become active, this study that I just read a week or two ago, says that 40% admit that they’re probably too active and that they’ve hurt themselves. (Source: Helen Modly, CFP, CWPA, Focus Wealth Management, Ltd., “How the Wealthy Avoid Behavioral Bias: 7 Strategies,” 2/13/2012.) So, I do, … I’m kind of giving a “waffle-y” answer here; I do believe it’s possible, it is extremely difficult. I believe that a better solution is probably to be well diversified and to tilt particular sectors one way or the other and be very well diversified. I do work with some good managers that I’m very pleased with their particular approach and I’d be happy to talk with you about them and the way that they manage money, not in a market timing situation but in a good active management situation where it’s deciding what are the “tilts” and the “weights” of that particular diversification.

Hopefully this video made sense and clarified things a little bit; either way, give me a call if you’d like to talk about it. I just absolutely love hearing from you and hearing from your friends. So pass it on to someone if you think that they could have some value from this video. 303-747-6455, my name is Mike Brady, here in Boulder, Colorado. You have a wonderful, wonderful week. Thanks! Bye, bye.

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