Market Timing Strategies on Portfolio Einstein


This is an article displaying the market timing strategies and portfolios on Market timing is sometimes referred to as trend following.

We have recently released a page displaying the 5 first market timing strategies that Portfolio Einstein track.


Market Timing Strategies on Portfolio Einstein

This is just a heads up for everyone who would be interested in seeing market timing strategies here on Portfolio Einstein.

We know that market timing is a contentious subject and practice. We are very pragmatic here at however, and as we have written elsewhere, we’ll invest in anything as long as there is good evidence that the investment will yield good results.

A good buy and hold strategy has a better than normal chance of yielding good results

A good buy and hold strategy has a better than normal chance of yielding good results, so this is the default option for anyone choosing to invest. The amount of evidence showing that a diversified buy-and-hold portfolio will get you to retirement or help you achieve your financial goals are pretty much without dispute at this point.

Is market timing better than buy and hold?

Market timing, however, is a different beast. There is not the same amount of evidence that shows that market timing is a good idea. This is because most market timing strategies doesn’t yield very good results. They don’t yield very good results because most of market timing doesn’t work as advertised. The reasons for this are many but some reasons include:

  • Many market timing strategies try to beat the market, which is almost impossible to do.
  • Market timing is subject to data-snooping (backtest bias) in which data is fitted to the strategy. I.e. the strategy works fine for the measured timeframe but not out-of-sample.
  • The strategy depends on very esoteric data points which are hard to backtest.
  • Market timing is complicated making it very hard to replicate the strategy in real life if you’re an average investor.
  • Market timing strategies cost too much to implement in trading costs, taxes and spread costs – not to mention headaches.
  • The indicators deicing whether you should buy or sell are hard to come by or cost money to obtain.
  • The strategy has not been properly tested (a variant of data snooping).
  • You can’t realistically follow the strategy because of human psychology. Would you be able to exit the stock market at an all-time high if the strategy told you to? Could you stomach to enter the market as the market kept its downward spiral?
  • The market timing strategy makes you lose confidence in the strategy and abandon it because it hasn’t done anything for you lately.
  • The strategy does not make intuitive sense. The strategy should work because something makes it work. Magic and voodoo doesn’t usually give you good returns nor does gut feelings.

How professionals use market timing

There are tons of hedge funds and ETFs using market timing. Most of them are not trying to beat the market because they know they can’t.  Instead, they are using market timing strategies to avoid large drawdowns. They are in other words using market timing to smooth the ride while not trying to make their returns not suffer too much. Normally you would smooth the ride using bonds or cash but the return on cash and bonds will create a drag on your overall portfolio returns.

They are using market timing strategies to avoid large drawdowns.

Professional money managers think about risk first and return second. This is in line with what Warren Buffet calls the first rule of investing: “Never lose money“. Money managers know that they need to control risk in order to make money. But they also need to control risk in order to retain clients or the clients would bail at the first sign of trouble. On the other hand, they cannot just ignore returns as no one would invest in a strategy that promised 2% compound annual growth if it cost 2% in annual fees.

How beginners use market timing

I have seen plenty of times how beginners use market timing. They think about returns then they think about the risk – if at all!. That is the exact opposite of what professionals do. Bginners see mouthwatering returns on a strategy they have backtested or seen some backtest and quickly say to themselves “if I could get 22% compound annual returns for 30 years I could own the universe!” Beginners in the stock market are thinking about how they can get rich not how they can build wealth. There is a not so subtle difference.

If I could get 22% compound annual returns for 30 years I could own the universe!

Beginners also think that market timing strategies are meant to beat the market.

Market timing strategies will not beat the market. There is a simple reason for this. If a strategy could beat the market everyone would adopt that strategy and the edge would disappear. This is discussed at length by for example Charles Ellis in Winning the Loser’s Game. Some strategies will on occasion in certain time frame times do just that.

Examples of this are when the market takes a big tumble like in 2008-2009. Most market timing strategies would have taken you out of the market well before the worst of the drop occurred. If you only sampled the market timing strategy in 2010 you would indeed see outperformance by the strategy.

Sure, there are quite a few, even quite simple strategies that can beat the market.

Does market timing strategies exist that show promise of beating the market. Sure, there are quite a few, even quite simple strategies that can beat the market. But they are few and far between and usually involve either gearing your portfolio or using very exotic indicators. Add to that it is impossible to say if the strategy will continue to outperform in the future.

One of Portfolio Einstein’s market timing strategies show indications of beating the market but if this outperformance will continue into the future is impossible to predict.

Beginners also hop and shop around for new better strategies thus not giving the strategy they currently use enough time to perform how it is should work. As Tom Garder says of the Motley Fool, a good way to increase your returns in your portfolios is to double you holding period. This goes for market timing as well. Pick a well documented and easy to implement strategy and stick with it.

Beginners obsess and fuss about all sorts of technical indicators that make up their strategy. I’m not even going to begin listing all the indicators that are all there. Some are really, really esoteric and others downright weird. Others make intuitive sense.

What about that new, revolutionary trading strategy?

You should come to terms that the strategy you are using is not new nor revolutionary. It is known and has been backtested. If you are wondering why a particularly good looking strategy is not being used by everyone, there is a reason why that is. It could be because the strategy just plain sucks (most likely). It could be that the strategy doesn’t fit well with the investment objective of other peoples portfolios or it could be they can’t be bothered using a market timing strategy or it could a host of other reasons. The one reason it is not is that the strategy is unknown. Nothing in investing is unknown, everyone has the same data, the same strategies, the same research, resources, etc. Read What’s The Most Important Question In Investing to know why this is.

Nothing in investing is unknown

How you should use market timing

We have two really good examples of how to use market timing.

The first example is taking a queue from Meb Faber and Paul Merriman’s personal portfolio. Both use market timing. Paul Merriman uses market timing in his own portfolio through his old firm that he founded. Merriman does not advocate the use of market timing.

Meb Faber is, by now a renowned market timer and in my opinion, has helped rejuvenate market timing and making it simple and effective. His Trinity portfolios have a portfolio of buy-and-hold and a portion of trend-following strategy (market timing). Meb Faber’s personal portfolio is also invested in the Trinity strategy.

Paul Merriman has on several occasion said that he holds about 50% of his total portfolio in a market timing strategy and 50% in a buy-an-hold portfolio.

The second example of how to use market timing is to use it on your savings portfolios. Because market timing strategies lower volatility (at least the one we display on you can add a bit of stocks to your savings portfolio in addition to bonds or cash – if that’s how you save.

Below is a very simple market timing strategy which can be used in a savings scenario. It consists of only two asset classes. The timeframe is 1994-2019. The max drawdown is only -4.93%, with a standard deviation of 3.92%. In my opinion, that’s a very acceptable risk to take.

PortfolioInitial BalanceFinal BalanceCAGRStdevBest YearWorst YearMax. Drawdown
Timing Portfolio$10,000$48,4496.38%3.92%23.88%-1.72%-4.93% 
Buy & Hold Portfolio$10,000$52,6656.73%4.99%24.14%-7.51%-13.41% 
Vanguard Total Bond Market Index Inv$10,000$35,0895.05%3.55%18.18%-2.66%-5.01% 

Where can I find market timing strategies?

You can find Portfolio Einstein’s market timing strategies on our page Market Timing Portfolios.

As of 01/08-2019, they have yet to go live as we are testing a few more additional things before we launch them. We want to make it easy to implement the strategies and want to launch tools that make it easy to follow all the strategies. That takes time, however.

We will update when we get closer to release.

Now it’s your turn!

What do you think about market timing? Do you want to see all the portfolios we have available or do you want them filtered?

Would you consider using a market timing portfolio?

Let us know!

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