On a recent Van Wie Financial Hour, and also in a recent Blog, we asked and answered the question, “Are we at the market top?” The simple answer was that no one knows. I volunteered to tell you the answer, but not until long after we are past that market top.
Judging whether or not we are at the top of the market is part of a practice called Market Timing. There are said to be three “conventional” contributors to success for investors; Securities Selection, Market Timing, and Asset Allocation. Market timers have no proven track record, any more than do the self-styled gurus who claim they can “beat the market” by selecting individual stocks. Most successful investors practice a much more sensible practice called Diversification. Asset Allocation is the process of diversifying a portfolio to optimize the risk/reward equation over time.
Researchers and statisticians have repeatedly shown, over the past 70 or so years, that Asset Allocation accounts for a minimum of 90% of success among similar portfolios. That leaves very little room for Market Timing and Securities Selection to make much difference. Given those circumstances, consider how you are spending your time and energy in your investing life. For instance, does it matter if Ford underperforms GM? Sure it does, if you are long either Ford or GM. What if you owned both in a mutual fund or an Exchange-Traded Fund (ETF)? The differential performance of the two stocks in the same sector becomes unimportant.
As Certified Financial Planners, one tool we use to design and implement diversified portfolios is called “Modern Portfolio Theory,” or “MPT.” MPT has been around since its original publication in 1952. We will be discussing this practice in depth on the Van Wie Financial Hour.
For now, I want to discuss one of the most unusual market timing methods to see if you will be impressed. It is called the “Hindenburg Omen,” which I assume reflects the inventor’s attempt to scare you. Here is the definition from my favorite website for this type research, Investopedia.com.
“The Hindenburg Omen is a technical indicator that compares the number of 52-week highs and lows to predict the likelihood of a market crash.” Investopedia goes on to explain all of the details required to establish that the Hindenburg Omen is possibly in play. The opening lasts for 30 trading days, and must be confirmed by something called the McClellen Oscillator, or MCO, being negative.
Confused? Me, too. All this in an effort to control one of two factors shown together to contribute 10% or less to your investing success. Life is too short to chase minimal potential returns at the expense of maintaining a good Asset Allocation plan.
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