Market Timing Is Market Timing, No Matter What You Call It

If you're looking for a simple strategy to make money in the stock market, here it is: Regularly invest in great companies, and stay in those stocks for the long term. Buy and hold. But there's an unquenchable human tendency to believe that we can do better by making active choices. Buy low, sell high, wait for a price drop, then buy back in again. Ride the cycles to wealth. All it takes is a really good crystal ball.

In this Motley Fool Answers mailbag segment, hosts Alison Southwick and Robert Brokamp -- and special guest Sean Gates, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool -- field a question from a listener who says he's not asking about market timing per se -- he's interested in investing to follow the business cycle. "Are there good rules of thumb or books you can recommend about timing the business cycle?" he asks. Why, yes -- we do have a rule of thumb or two.

A full transcript follows the video.

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This video was recorded on Jan. 29, 2019.

Alison Southwick: The next question comes from Eric. "Everyone says you aren't supposed to try to time the market because you can't win. But what about changing portfolio allocations in line with the business cycle, especially since there's a degree of certainty in the stage of the business cycle like the seasons. For example, right now people are anticipating the end of the current bull market and possibly changing their allocations. Are there good rules of thumb or books you can recommend about timing the business cycle?"

Sean Gates: My answer to this is going to sound snarky, and it partly is. I have folks who call me and always start the conversation with, "Well, I don't practice market timing, but what if I did this?" It's just a fancy way of rationalizing market timing, and that's what you're doing. At least you called it that at the onset of your question. But what you're trying to do is time the market and it's a fool's game. You can't do it. I could provide you with books to recommend how to time the business cycle and I could also provide you books that did it based on weather, or charts, or some other random [expletive] that doesn't matter, but it doesn't work.

So what I would suggest as an overarching thesis to think about as a different mechanism is just good, old asset allocation. If you're worried that we're at a market top of some kind, and you find yourself in, let's say, an 80% equity, 20% bond portfolio, or some variation therein, more weighted toward equity, shift your asset allocation less in equity.

You can talk with someone or we can come up with guidelines on what it would be, but that should be your method of market timing. Shift out of equities into a conservative allocation, do so on some time-based regimen -- let's say quarterly or every six months -- and then when you see the market pullback that you think you know is coming, shift back to where you were. That's the only version of market timing that I suggest to folks, because it's the most implementable and regimented that you can follow.

Robert Brokamp: The bottom line, and I may have said this before, but I've been in this business, now, for more than 20 years and I've never found anyone who's successful at doing this. Eric compares the business cycle to the seasons, but the truth is the business cycle is not as predictable as the seasons, and right now we're in the second-longest expansion in history. If you sold your stocks just because we had exceeded the average of five years of an expansion, you would have missed out on the next four years. It's just not that systematic.

Gates: And the old saying is there's more money lost waiting for a pullback than in the pullback itself. I run into this all the time -- where people got out in 2008. Maybe they were right. Maybe they got out before the crash, but then they stayed in cash for 10 years and they have watched their portfolio flatline; whereas, people who stayed in are far higher than they would have been even accounting for the drawdown. I just can't preach against market timing enough.

Southwick: There was an article on MarketWatch.com where they looked at the worst market timer in the world. They did this model portfolio of someone who always sold and bought at the wrong time; but because they stayed in, they still did very well.

Brokamp: Right. They purchased at the top of the 1987 market and the top of the 1973 market -- all those -- and they still came out fine.