No. of Recommendations: 15
The MI FAQ names this FC post "maybe the best thread on Timing from the old MI board". (I don't think FC's 2014 post is on shrewdm, as shrewdm says "There are no Mechanical Investing board posts related to 'flamethrower'." Now there is!)
MI FAQ link is
mechinvesting.wikidot.com - Timing methodsRepost of an earlier message:
Author: FlyingCircus
Subject: Re: Timing
Date: 4/11/2014
They`re mostly right, but - this is not news about timing. This is one of those "mathematical numbers vs real life numbers" polemics. Yes, the tradeoff is less volatility and frequently, but not always, at the expense of better returns.
The point of timing is defense, capital protection. Especially for those diligent and fortunate enough to have grown a six-figure plus portfolio over time, it makes sense to provide protection against the infrequent but devastating drawdowns caused by bear markets.
By example, I lost 36.7% of my portfolio value from the top in October of 07 to the bottom in March of 09. Numerically, I beat the market by over 10 percent - oo, yea! - mainly because I followed timing with my MI portion and went to cash.
That loss at the point still represented over ten years of making 401K contributions with generous company matches from a very good salary.
The basic timing methods here would have limited that loss to a very palatable -10% or so. Yes, they also missed the first 15% of that V recovery coming back - but when you`ve got a nearly 40% positive gap head start from one event, so what?
At the hard right edge in February of 2009, or even September 2008 when the market had flamed out, it sure as heck made more sense to have been watching the SMAs or the NH/NLs and say "let`s just watch this shtishow from the sidelines" than to believe "yeah, it`ll all come back in a year". Who out there had enough sudden restored faith in The System that had just apparently lost its mind, to believe or much less predict that V bottom was The Bottom?
It`s fine for these guys to say in hindsight, "gee, just have faith, you should have stayed in because it`s now back higher than it was." When one had just watched their retirement get pushed off until forever, that`s a pretty tall order to ask.
This is real world money vs. numerical exercises on a chart. It`s also about trust in markets.
It makes more sense to watch most of Mr. Market`s gains pile up while the taking is good, and be able to recognize when the flamethrower is coming out and get most of the cash out of the pile before half of it burns up.
60, 70, 80% of the time, the fire wasn`t bad and you miss a little. The other 20 or 30% of the time makes it all worthwhile.
FC
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