Market Timing Portfolios

This page displays market timing portfolios available on portfolioeinstein.com.

EDIT: We are still doing some additional test on the strategies to make sure the data is reliable. Therefore you will only find cursory return data on the strategies. The names of the strategies have also been anonymized until we are certain that the strategies are ready to be published!

We have 75+ market timing strategies collected but most of them are worthless. They are either impractical to implement, too complicated, not performing well out-of-sample or too expensive to maintain. We start off with 5 very well documented strategies that have plenty of data available and plenty of out-of-sample data.

What is market timing?

Market timing is when you try to capture returns while trying to reduce drawdowns.

This sounds like a fantasy land, and indeed in most cases, it is a fantasy.

Here at portfolioeinstein.com we are huge proponents of diversified buy and hold portfolios.

However, we also take an evidence-based approach to investing. The evidence shows a strong case for buy and old. But the evidence also shows, through many studies, that a few market timing strategies could prove useful for a portfolio.

On the other hand, there is also a mountain of evidence that shows that most market timing strategies fail to beat the market. This is due to a number of reasons:

  • Market timing tries to predict the future which you can’t.
  • Market timing often exposes you to more fees in the form of trading cost and spreads on assets.
  • Market timing exposes you to detrimental human behavior as most often you need to follow a set of rules in up-times as well in down-times of the market. This can be hard to follow through.
  • Market timing strategies will often not mirror the returns of the broader market which could induce angst in the investor.

There are plenty of market timing proponents, but as stated, most market timing strategies will not outperform the market even though they are marketed as such.

Meb Faber and Paul Merriman are two people that tout the virtues of market timing. Both use them together with a buy and hold allocation.

Portfolio Einstein’s market timing strategies

The market timing strategies that we have collected are not designed to beat the market but to have market-like returns while lowering volatility. In our opinion beating the market should not be the purpose of market timing strategies, as it is almost impossible to do.

Instead, the market timing strategies that we display are designed to:

  • Lower volatility (fewer extreme prices bounces)
  • Be simple to implement.
  • Be simple to understand.
  • Have a long backtest dataset available.

This means that strategies using market timing will always be a little late to the party but they will also make you leave the sinking ship when the storm approaches. This is extremely welcome for those that are risk-averse.

Market timing strategies

Portfolio NameData sinceCAGR since data startStdSharpeDrawdownMarket Correlation
Strategy 1198510.23%11.51%0.63-23.86%0.76
Strategy 2198710.92%11.38%0.7-23.52%0.75
Strategy 3199913.37%16.77%0.73-24.27%0.56
Strategy 419739.82%n/an/a-12.87%n/a
Strategy 519989.93%12.03%0.6919.70%0.7

As you can see the strategies have market-like returns while enjoying a 50% lower drawdown. That’s like getting the both of two worlds. While they all put up very good numbers, strategy 3 and 4 really stand out. Strategy 3 because of its high returns compared to its drawdown and strategy 4 because of its extremely low drawdown. It’s like having a 60/40 portfolio with 100% stock return.

I know it sounds too good to be true and it is also why we have been hesitant in publishing the portfolios. However, the data speaks for itself and more importantly the out-of-sample data of the strategies since inception has been similar to the backtested data. This is important because anyone could come up with an extremely historically well-performing strategy just by fiddling with the data. That, however, is data-snooping and is very prevalent in market timing circles.

A good strategy should perform similarly in the years after the strategy’s inception as it does during the backtest data.

Disclaimer: There are many factors that go into choosing your right portfolio, though not as many as you would think. Therefore, the information here presented are not specific recommendations but instead for information purposes only.

How should you use a market timing strategy?

A great way to use market timing is to include it in your overall portfolio. Paul Merriman has two buckets for his investments:

  1. 50% of his overall portfolio is in a market timing strategy.
  2. 50% is in a buy-and-strategy which I believe is 50% bonds and 50% stocks.

Mebane Faber employs a very similar system because he uses his Trinity portfolios which is also a mix between market timing and a buy-and-hold strategy.

These two ways are a great way to use market timing on your overall portfolios. If you combine market timing with buy-and-hold you can enjoy the following benefits:

  • You get a great return per unit of risk – you get 100% stock like returns while enjoying a 60/40 portfolio’s risk.
  • In down times you are at least doing something to stop the bleeding. The market timing portfolio will take you out of harm’s way before the worst of the stock market decline. This will make you feel pretty smart.
  • You can brag to your friends that you are a very savvy investor – though buy-and-hold is pretty savvy!
  • You just might (might!) outperform the market when the going gets tough.

Market timing strategies are not hard to implement. They do require that you check a spreadsheet once a month, which is way more than a buy-and-hold. Sometimes you need to make a trade which maybe will incur trading cost and taxes. However, the strategies we present will not be complicated to implement and all the strategies will have thorough instructions on how to implement and maintain them, probably using a Google spreadsheet as they can dynamically update.

Now it’s your turn!

Which portfolio are you leaning towards and why?

What is your take on market timing in general?

Is it something you would consider using?

We would love to hear your take on it.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top