Market Timing Bests Buy & Hold – Stern School of Business Study

Posted by Barry Ritholtz - The Big Picture

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Here’s something that oughta give the marketing wizards at traditional Wall Street firms a heart attack: Timing beats buy and hold, according to a study by  finance professors at the New York University Stern School of Business.

I doubt its pure timing — my best guess is, the fund managers involved more likely used aggressive risk management tools and capital preservation strategies. To the unknowing, these look like timing but are not.

The profs found that fund managers who invest based on macroeconomic trends — and are willing to adjust their portfolios as those trends change — are the managers most likely to add value for investors.

How you define “macroeconomic trend changes” and the basis of portfolio adjustments is a key factor — one that is not delineated all that clearly:

“By analyzing data from January 1980 through December 2005, the study identified the top 25% of actively managed equity mutual funds based on their ability to select stocks during expansionary economic periods. The report noted that this same group showed proficiency at market timing during recessions as well.

This group outperformed other funds in both risk-adjusted terms and after expenses, according to the study.”

Cash has beaten stocks for the past 10 years; Even worse, Bonds have beaten Stocks since 1966. To me, this suggests that an active asset allocation program (rather than pure market timing) is the way to go for most high net worth investors.

Despite the weak stock performance, expect massive pushback on this from the long-only, fully-invested, fee-based actors on the street.

Already, we see critiques from Morningstar. Russel Kinnel, the director of mutual fund research, carped that “the 1980s were littered with funds that blew up because managers tried to follow macroeconomic trends.”

The Street will this line of thought tooth and nail, but given the horrific performance if the LOFIFB firms, they have their work cut out for them . . .

Market timing trumps buy-and-hold strategies during market swings, says NYU study
Investment News, David Hoffman


About Barry Ritholtz:

A frequent commentator on economic data and financial markets, Barry L. Ritholtz is a regular guest on CNBC, Bloomberg, Fox, CNN, ABC, CBS, PBS, MSNBC, and C/SPAN.  He has appeared on many shows, including Nightline, ABC World News Tonight, Fast Money, Kudlow & Co, and Power Lunch, and has guest-hosted Squawk Box on numerous occasions. He appears regularly on Bloomberg Radio, NPR, CBS, and other radio broadcasts.

Mr. Ritholtz was profiled in the Wall Street Journal’s Quite Contrary column (August 3, 2004; Page C3). More recently, he was the subject of a Barrons interview, titled A Leading Bear Turns Bullish, Sort of (December 8, 2008). His market perspectives are quoted regularly in the New York Times, Wall Street Journal, Barron’s, Forbes, Fortune, Smart Money, Kiplingers, and many other print media.