It is a truism of many conservative institutional investors that no good can ever come of trying to time markets. Trying to make investment decisions based on where markets are likely to go almost always, so the argument goes, leads to folly far better to establish a prudent asset allocation and stick with it.
Now a white paper put out by $620 million, New York-based alternative-investment firm Spring Mountain Capital asserts that prudent market timing can be an effective way to preserve and even grow capital.
If you successfully market-time, then the volatility of your equity investments is going to be far less than the volatility of the Standard & Poors 500 itself, says Haim Mozes, who is a senior quantitative consultant for Spring Mountain, an associate professor of accounting at Fordham University Graduate School of Business in New York and co-author of the paper Evidence in Support of Shorter Term Market Timing.
Research by Mozes and his co-author, Spring Mountain quant analyst Serge Cooks, found that quantitative signals, such as those that indicate a highly oversold market, can be effective indicators of when to market-time. By doing so, an investor can reduce a portfolios volatility and limit some downside losses in effect, rebalancing. This is something many hedge fund managers, especially the more-quantitative funds, can do consistently in response to markets, but its something at which many traditional investors (such as pension funds, foundations, endowments and other institutions that often meet only monthly, quarterly or even annually) are far less efficient.
Spring Mountain does not suggest that market timing be left up to individual discretion. In volatile markets individuals can make very bad decisions it is natural, for example, to want to double down on losing positions or get out of a falling market. Instead, they advocate relying on quantitative triggers as an indicator of when to reallocate during times of market stress, because during times of market stress, these can suggest when a market or security is extremely under- or overvalued.
The approach Spring Mountain advocates is not, Mozes insists, a short-term one. Market timing does not make you a short-term investor, he says. You are still a long-term investor. The inflection points that call for rebalancing typically come once every three to four years, he says, though in the volatile environment of the past few years they have been coming with more frequency. The ability to preserve capital in uncertain times is another reason investors might want to reconsider their attitude toward market timing.