Positioning vs Predicting: The Right Way to Time the Market

Position Your Assets or Predict the Future? How to Time the Market



Have you been accused of market timing? And now you feel shame…

You can’t time the market… c’mon man. But there is an acceptable way to time the market: what about positioning assets rather than predicting the future?

Recently, I came across the idea of positioning vs predicting. If you want to time the market but not be accused of a foul, read on.


Don’t Time the Market

As the saying goes: time in the market is better than timing the market.

What does that mean? It means you miss the big up days if you pull yourself out during the big down days. Volatility is always around, and big volatility to the upside is temporally related with big volatility on the downside. You cannot miss these big up days!

I learned this message well last March when I was trying to tax loss harvest a legacy Mutual Fund in my brokerage account. The market was down 10% and I sold in order to buy a more tax-efficient ETF while taking the tax loss. Of course, mutual funds settle at the end of the day…

But the next morning, the market was up 8% at open. I did not buy back in as planned and missed some nice days of recovery. Low and behold I sold at the market bottom but didn’t get back in due to volatility.

And that is the difficulty with timing the market, you need to be right twice: both when you sell and when you buy. This is one reason to own the total stock market ETF rather than individual stocks. Then you know when to buy (when you have money) and when to sell (when you need money). No market timing necessary!

You know better than to time the market. No one is right twice. Not all the time.

Now, what is like timing the market but not a party foul? Positioning.


Positioning is Like Market Timing

What if you position your investments to take advantage of market volatility rather than trying to predict the future?

Positioning vs. predicting:

  • Predicting means guessing if the market will be up or down.
  • Positioning means deciding ahead of time on asset allocation and rebalancing strategy.

Let’s look  at asset allocation and then rebalancing strategy.


Positioning Your Investments: Asset Allocation

Positioning your investments is short hand for asset allocation.

If you have bonds in your portfolio, then you can rebalance and sell them while they are up in order to buy stocks when they are down. That’s right! You just rebalance your position rather than predict the market. No foul!

Of course, you can’t be 100% equities in order to take advantage of positioning your investments.

But you don’t want to be 100% equities anyway.


Why Don’t I Want to Be 100% Equities?

Even if you are young and have time on your side, in order to take advantage of rebalancing during a downturn in the market, you want to have at least 10% bonds in your portfolio.

After all, a 100/0 equity to bond ratio is just about as good as a 90/10.

Wait, no one has told you that before? Well, just take a look at the efficient frontier.

positioning vs predicting

Above, you can see the efficient frontier. Returns are on the vertical, and risk (as measured by standard deviation) is on the bottom. Basically, the efficient frontier is the set of portfolios that offers the highest expected return per unit risk. Reward due to the risk you take given your asset allocation.

The top right dot is a 100/0 portfolio with the highest risk and the highest return.

But look at how shallow the slope is when you go down to 90/10, 80/20, etc.

You take less risk, as you drop down your asset allocation, but the reward is not much different. My point: 100/0 is not much different than 90/10.

Once you get down to the 60/40 portfolio (the circled dot), then back up two more to 40/60. Here, the curve takes an unusual turn: more bonds actually increase the risk AND lower the return. Portfolios with more bonds than 30/70 have more risk and less returns. Who knew?

Go efficient frontier! Of course, it is not that simple, as the efficient frontier changes depending on the actual returns and volatility during a given time period. Let’s check that out now.



Positioning vs Predicting over the Decades

This is going to be fun!

positioning and predicting

Above, you can see the curve looks different for different decades. Spend a little time looking at this graph, but let me just point out that the 60’s (light blue) had a pretty normal looking efficient frontier. The 70’s, on the other hand (in green) had flat returns regardless of asset allocation.

Next, in red, look at 2000-2004. Look closely! During that period, bonds are actually on the top (where you would expect to see stocks), and you got less return and more volatility for 100% stocks!

Finally, in black, see the average from 1960 to 2004.

These are inflation-adjusted (real) returns, and they make several important points. But the point I want to make: 100/0 is not much different than 90/10, or 80/20 for that matter. Look at the evidence above!

But when you have bonds, when you are positioned correctly for your risk, you can time the market!


Rebalancing: When You Have Bonds, You Can Time the Market

Or rather than time the market, you can rebalance your position when it gets out of whack.

Remember the goal is not to predict the future. If you could do that, you’d be rich and not bother with blogs on the internet. But no one can do that despite knowing that every year there is usually a 10% drop in the market, and every 5-7 years a drop of 20% plus. These are the times when the impatient transfer their money to the patient.

Positioning vs predicting. You want to have bonds so you can use positioning to time the market via rebalancing.

When to rebalance? Well, do it when the market is high to control your risk and get back to your preferred asset allocation. And do it when the market tanks to sell high (bonds) and buy low (stocks). I haven’t written anything about rebalancing because you can’t do better than this whitepaper from vanguard.


Summary: Positioning vs Predicting

If you don’t want to be called a market timer, use positioning (asset allocation) and rebalance.

If your asset allocation is, say 80/20, it’s not because you expect better returns. Asset allocation is about higher risk-adjusted returns.

Remember, concentration makes you rich, diversification keeps you rich.

Risk-adjusted returns (and even anxiety-adjusted returns) are more important after you have saved up some money. Sure, initially, go 100% stocks. Once you have “enough,” however, take some risk off the table and invest per your preferred asset allocation.

Then, as stocks tend to increase more than bonds over time, you rebalance from stocks to bonds to keep your risk in check.

And when there is a drop in the market, rather than time the market, you use bonds to buy stocks.

This is rebalancing rather than predicting! Positioning vs predicting.

If you don’t want to be accused of being a market timer, be a positioner. Set your asset allocation and rebalance.

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One Comment

  1. Brilliant! I love the concept of repositioning vs timing! Who knew that the difference between 100% stocks and a 80 20 stocks to bonds was much different?

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