ETF Core Strategies
Aim: To trend-trade general equity ETFs so as to ride rallies and buck busts in the Australian share market.
Market timing is simply identifying when a market such as the stock exchange is attractive for investors and when it’s not.
The first rule of share investing is to preserve your capital. That means stepping aside from the market when it’s undergoing a major correction, yet being in the market when it’s enjoying a sustained recovery.
Such a risk management tool is what MarketTiming offers. Our computer generated market timing signals are designed to help reduce the risk of share market investing by indicating when it’s smart to buy Australian shares and when it’s prudent to sell them. Your existing share exposure may be through an active or passive mutual fund, a superannuation fund, a listed investment company or an exchange traded fund.
Our signals are best suited for exchange traded Australian equity funds such as State Street Global Advisors SPDR S&P/ ASX 50 Fund (ASX code SFY) which invests in the top 50 listed companies, SPDR S&P/ ASX 200 Fund (ASX code STW) which invests in the top 200 and Vanguard’s Australian Shares Index ETF (ASX code VAS) which invests in the top 300.
Exchange traded funds (ETFs) are a simple and inexpensive way to gain a diversified stake in the top 50, 200 or 300 shares on the Australian stock exchange thereby minimising specific risk exposure to any one company. Because they have very liquid markets they can be bought or sold instantly through any stockbroker either by phone or online. They also have very low annual management expense ratios (less than 0.3% per annum). For these reasons they are the preferred class of investment vehicle for market timing.
Unlisted managed equity funds and retail, industry or corporate superannuation funds that involve a few days delay in units being bought or sold are not suitable for our Conservative strategies. Only our Conservative Strategy should be considered in such cases and the risks involved with a delayed application of our signals should be taken into account.
Of course whether you should invest in shares, how much you should commit and the best instrument to use will depend on your personal circumstances and risk profile so consult a financial adviser about these matters. Our job is not to give you personal investment advice, but to produce market timing signals you can use to ride share market’s waves without getting severely dumped.
Our aim is to help you avoid market crashes while still enjoying market advances. We want to improve your chances of making capital gains without taking excessive risks with your hard earned savings. That means abandoning the roller-coaster ride of ‘buying and holding’ shares for an indefinite period regardless of market conditions. It means embracing market timing.
If you are already a share investor, imagine if you had used our model’s signals at the end of 2007 to get completely out of shares or to tell your superannuation fund to shift your retirement savings to a safer cash option until the model signaled it was appropriate to get back into the market. How would you feel now?
You would have avoided most of the huge fall in share values from November 2007 to March 2009 while your cashed out savings were earning interest. You would have got back into shares in March 2009 and ridden the subsequent swing up.
The following chart shows how MarketTiming’s Conservative Strategy performed against a buy and hold approach to the Australian share market (All Ordinaries Index) based on back-testing our model over the last 25 financial years or so.
Market timing is first and foremost a tool for managing market risk.
The extent of reward for the level of risk associated with an investment strategy is commonly measured by the ‘Sharpe’ ratio; named after its creator – Prof. William Sharpe of Stanford University. By this yardstick all our timing strategies outperformed a buy and hold approach by a wide margin. For instance the Conservative Strategy scores around 80% versus buy and hold’s 45%.
Managing risk is a survival skill we exercise every day. Take the analogy of bathers at Sydney’s Bondi Beach. They enter the water (the share market) when the flags say it’s safe and they retreat to the sand (a cash management trust) when the lifeguard signals it’s too dangerous to swim because of rips or sharks. Ignoring such signals would be foolhardy. Yet most investors adopt a ‘set and forget’ approach to their share portfolios or superannuation funds in the belief that in the long run everything will be alright.
If you are young that may be true. But if you are retired or half way through your career you should be aware secular bear markets typically last 15-20 years. Indeed, in the US, anyone holding an ordinary portfolio of shares in the last ten years has lost a large chunk of their capital. Even investment legend Warren Buffet lost money in this bear market. Only those who adjusted their share exposures using a demonstrated market timing system like the one we use have weathered this storm.
Unlike most share market commentators, we don’t try to forecast where particular shares or the market as a whole will be in future. Instead we use a computer model to generate proprietary signals when you should be in or out of shares. It’s as simple as that. There’s no need for you to become an expert in technical and fundamental market analysis, just a willingness to heed the ‘Buy’ (enter the share market) or ‘Sell’ (exit the share market and go to cash) signals when you get them.
This will significantly reduce your risk of being caught in a market crash while helping you to spot major upward moves in the market so you don’t miss out on capital gains. You will receive this benefit each and every year rather than waiting forlornly for share prices to get back to where they were at their peak.
Conservative investors are those who don’t want to change their share exposure too often. Our Conservative market timing strategy spots only big share market moves so are designed to generate around 2 entry or exit signals a year. In some years they may generate more signals and in other years none.
Your temperament should guide what style best suits you, but talk to your financial adviser before making a decision. Once you start you should not switch between timing signals as that can backfire.