By Bruno Giordano

Published May 1999

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I have had the distinct pleasure of asking some of these pundits point blank, "What does ‘doesn’t work’ mean?" It seems that’s a troubling question for them in that what I usually receive in response is lots of hemming and hawing. Then, finally, comments like "it doesn’t beat the market," "nobody can pick the exact top and exact bottom," "buy and hold for the long term is the only way to go," and my absolute favorite from the dean of all market timing watchers, Hurlbert of Forbes magazine, "Market Timing doesn’t beat the market, all it does is reduce the risk."

I would like now to attempt to dissect each of these comments in turn.

"It doesn’t beat the market!" That’s probably true when the market is performing admirably (1991 to present). The statement is not true in bad market years like 1990, 1987 and especially from 1966-1982, that’s right, for sixteen years.

"Nobody can pick the exact top and bottom!" That’s probably true as well. But you don’t have to. If you avoid 80 percent of the major losses (I define major as anything over 20 percent) and capture 80 percent of the major gains, you will match the market with sharply reduced risk.

A recent study published in Financial Planning by two of the best financial minds in the country, Andrew W. Lo of the MIT Sloan School and Joseph P. Wargrove of the Wharton School, University of Pennsylvania, demonstrated that from 1926 to 1996, $1 invested in T-Bills would have grown to $14, whereas, $1 invested in the S&P 500 would have grown to $1370. However, if one had perfect foresight on a month-to-month basis, that $1 would have grown to $2,303,981,824. That’s right, billion! This is not a typographical error.

Our illustrious doctors go on to write, "...even a modest ability may be handsomely rewarded. It does not take a large fraction of $2,303,981,824 to beat $1370."

"Buy and hold for the long term is the only way." I suggest that the people maintaining this position haven’t thought it all the way through. This strategy may be okay for those who have the tenacity to stick through 50 to 85 percent losses (1973-1974) or 80 to 90 percent losses (1929-1930) and not panic. By the way, they also have to wait about 15 to 25 years to get back even. Assuming there are such steely-nerved individuals among us, could they afford it? I suggest that only those people who don’t need access to their money or can afford to take only three percent of their assets to maintain or augment their lifestyle can afford this insanity. Buy and Hold indeed!

"Market Timing merely reduces risk." What else is there? If you depend on your liquid invested assets to live on, you absolutely, unequivocally, without doubt, cannot afford to lose money. Another recent study in the June 1998 Journal of Financial Planning titled, "How Much is Enough?" by Robert T. Nash, Ph.D., John Andrew Bonno, Ph.D. and James K. Kennedy, Ph.D. demonstrated that if you invested in the S&P 500 or any diversified portfolio in 1972 and took out more than three percent per year, adjusted for inflation, to live on, you would have been broke in 13 years (at seven percent withdrawal), in 15 years (five percent withdrawal) and so on.

If you believe market timing reduces the risk, (which it does), then you can move more money to asset classes that promise higher return. You may not "beat the market," but you can "beat the portfolio."

If you believe as I do that this top-heavy market is about to receive its comeuppance, then you should seriously consider taking small losses quickly. That’s what it’s all about. Avoid major loss, reduce the risk, and even if you don’t "beat the market," at least you’ll have the assets available when you want them.

One last thought: our omnipresent sagacious pundits are always telling us that, when the market drops (like July to August, 1998), it’s an opportunity to buy. With what? If you are buying and holding, where does the money come from?

Market timing reduces risk and, when bear markets abound, it beats the *!@?* out of the market.

Now is the time!

Bruno Giordano is president of Dorset Financial Services in Devon, Pa.