With the Dow Jones Industrial Average recently — and finally — eclipsing its 2007 high, many investors have been wondering when the bull market will end. But in a column for Barron’s, Mark Hulbert has a message for them: Be very, very careful if you’re trying to pick the top.
Hulbert looked at returns since October 2007 of the more than 100 market-timing newsletters and web-based advisors monitored by his Hulbert Financial Digest, looking to see who correctly called both the market top in 2007 and the market bottom in 2009. Not surprisingly, no one was exactly right — as in, down to the day — in calling the top and bottom. But, Hulbert says, even when he relaxed the standard significantly, the results weren’t good. He looked at how many advisors decreased their allocation to stocks by at least 25% within a month of the October 9, 2007 top, and increased their stock allocation by at least 25% within a month of the March 9, 2009 bottom.
The results: Hulbert found that only 15 of 140 strategies tracked by his digest had significantly lower equity exposure a month after the 2007 top, and of those, just six had markedly higher equity exposure a month after the bottom. “In other words,” he says, “96% of the market-timing strategies monitored by the HFD failed to jump over these seemingly modest hurdles.”
What’s more, the six that did meet the timing criteria had other issues. “Each of them issued a number of additional buy and sell signals during the bull and bear markets, above and beyond their well-timed signals that give them bragging rights for ‘calling’ the October 2007 top and March 2009 bottom,” Hulbert explains. “These additional signals had the unfortunate effect of frittering away the gains they otherwise would have realized if they had left well enough alone.”
Hulbert says about one in four of the market-timers he tracks did turn a profit and beat the market over the past five-and-a-half years. But, he says, “none of them did so by getting out at or near the top and getting in at or near the bottom — as defined by the criteria I employed above.” He also says discipline is crucial when following a market-timing approach. He looks at the track record of one advisor whose returns have been hurt because he started to second-guess and override his timing system’s signals.
Hulbert’s bottom line: “Realistic expectations are crucial. Without them, you are more likely to try something rash and end up losing even more money. For example, you should give up hoping to both catch anything like the top and the subsequent bottom.”