2019_04_21 — “Market Timing”

Market Timing

There has been broad consensus for a couple years that we have been late in both the credit and economic cycles. The recent market volatility towards the end of 2018 and a partially inverted yield curve fueled the belief that recession was on the horizon. I, however, have long held that we are long cycle, not late cycle. The real cycle turning point could still be years away and the opportunity cost of sitting it out for the duration could be material. Thus, one wants to, or wants their investment manager to closely monitor business, consumer, and economic data in real time, both domestically and abroad. As stewards of your capital, your manager should position cautiously while still taking advantage of opportunities as they present themselves.

The real cycle turning point could still be years away and the opportunity cost of sitting it out for the duration could be material.

When it comes to the topic of market timing investments into or out of real estate, equities, credit, commodities, or anything else, we tend to hear a lot of pundits making headlines rather than making good calls. Market timing, however, is not to be confused, with getting out when investments are expensive and getting in when things are cheap; that is part of normal asset management. Market timing is a short term or long-term strategy that tries to deduce the best time to enter or exit a market. To be effective, market timing should factor in the effects of liquidity, transaction costs, and tax implications; the concepts and strategies behind market timing differ tremendously between liquid investments (like equites and high yield) and illiquid investments (like real estate, venture capital, and credit funds). Overall, people are notoriously bad at market timing, and subject to a slew of behavioral biases; usually, the best time to invest is yesterday and the best time to sell is tomorrow [figuratively speaking of course].

usually, the best time to invest is yesterday and the best time to sell is tomorrow [figuratively speaking of course]

One of the biggest costs of market timing is being out of the market when investment returns surge, potentially missing a year’s worth of normal performance within the span of less than a month or week. The largest surges often occur when things go from horrible to just okay, not when they go from good to great. A capable manager that can find idiosyncratic opportunities should allow you to do well over time through strategic allocation. You and your manager can always tactically adjust, but most of the time, the average portfolio should at least be in the game. You do not need perfect timing to earn attractive returns. Strategy and investment fundamentals ultimately drive long-term performance.

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Michael Ashley Schulman

Michael Ashley Schulman

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Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm