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ETF Core Strategies

Aim: To trend-trade general equity ETFs so as to ride rallies and buck busts in the Australian share market.

ETF Rotation Strategies

Aim: To back the local and foreign sector ETFs with the strongest price gains over both short and long terms.

Why don’t financial advisers recommend market timing?

In the US they do, but in Australia most are unfamiliar with it and in any case were trained to believe there was no alternative to buy and hold. Their mantra is that it's "time in the market" not "timing the market" that counts.

Financial planners who are paid entry fees and trailing commissions by large active funds managers have no incentive to favour market timing which uses low cost exchange traded funds that don’t pay such incentives.

The antipathy to market timing is reinforced by retail funds managers who, for reasons of convenience and profit, discourage their clients from switching between income assets (e.g. cash/fixed interest securities) and shares even when the share market by any reasonable measure (e.g. price to book value, price to earnings ratio or bond yield to dividend yield) looks overvalued.

Because it may have served us so well for so long, buy and hold is hard to discard. Yet the chief academic exponent of buy and hold, Professor Jeremy Siegel, in his classic book – Stocks for the Long Run – admits that a crude timing technique such as a 200 day moving average crossover produced better results than buy and hold when back-tested over 120 years. Of course proprietary market timing models, like MarketTiming’s, use a more sophisticated toolkit that this.

Australian All Ordinaries Share Index showing 200 Day Moving Average, 2001 – 2009

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Question: If you’d known in 2007 that the All Ords index had broken through its 200 day moving average for the first time since the stock market crash of 2002 would you have stayed in the share market? Why didn’t anyone tell you?

What advisers often forget to tell their clients is that the share market is prone to major corrections or large sideway movements that can last for many years before prices resume an upward path.

If you are close to retirement you may not be able to afford the share market gyrations that go with a buy and hold strategy. Leaving your savings in low interest bearing cash may not be an alternative either. Instead, using a good market timing model offers you the prospect of riding a stock market wave when it surges up, but escaping it before it crashes.

In the chart below note how the US's Dow Jones Industrial Average index fluctuated wildly within a sideways channel for 17 years from 1966 to 1982.

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The next chart shows how for 22 years from 1928-54 the US share market showed no overall capital gain either.

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And, as demonstrated by the next chart, since 2000 the US share market has moved up and down within a horizontal channel without yet breaking out.

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Over the last 80 years, US investors endured a secular bear market for 60% of the time and enjoyed a secular bull market for only 40% of the time. Baby-boomers were particularly fortunate since most of their working lives were spent in prosperous times. But they may not be as lucky in old age.

During past secular bear markets, long-term buy and hold investors at best earned dividends since there was no sustainable real capital gain. Only investors who successfully timed the market captured capital gains during the upswings and hung onto them during the downswings. In addition they earned a combination of dividends (when they were in shares) and interest (when they withdrew their funds from the market and put them in cash savings accounts).

To avoid the emotional rollercoaster of share markets, it makes sense to stay out of them when they are falling and to take advantage of them when they are rising. Of course if everyone tried to do this it would not work. But since a majority of investors are wedded to buy and hold the prospect of market timing becoming too popular is remote. This is especially so given that retail share fund managers want their clients to continually add to their holdings (since they are paid for funds under management), not to periodically withdraw them when the market looks overbought.

One scare tactic used by buy and hold advocates is that if an investor trying to time the market missed the five best trading days each year their returns would be abysmal. What they don’t say is that if an investor could avoid the five worst days in the market each year their returns would be outstanding.

This is not just hyperbole. Jim Rohrbach, using his RIX market timing model has been issuing bi-weekly signals for the US stock market for 40 years. Even during the current bear market, the most vicious he has witnessed in his career, he accurately boasts that anyone who has followed his signals has outperformed the legendary Warren Buffet!

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