Visual proof that investors are bad at timing the market
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Visual proof that investors are bad at timing the market
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Re: Visual proof that investors are bad at timing the market
#2if investors were good at timing markets, you wouldn't need to time the market
Re: Visual proof that investors are bad at timing the market
#3How does outflow of capital from one asset to another measure investor's ability at timing the market? Yes, one pulls out on equity if one predicts that S&P500's going to drop but most of times decisions are made based on the volatility and risk tolerance. A retirement fund with a closer retirement date or income/growth fund will pull out if they find the risk/volatility level of the general market to be unacceptable.
A better measure of investor's ability to time the market is the performance of hedge funds as by its nature, the traders trades both sides of the market and performance is measured by their ability to predict both downward and upward trends.
Re: Visual proof that investors are bad at timing the market
#4Where is the link between the graphical analysis (investors as a whole are bad at timing the market) and the subsequent quotes, (e.g., Bogle saying "I do not know anybody who has done it successfully and consistently. . . .")
It is a far cry from knowing that investors _as a whole_ don't market time well, but that has nothing to do proving that some skilled specific investors might not be good market timers.
For the record, I do think there's evidence out there that does show that even the "best" market timers succeed largely because of chance or luck, but it's not something you can get to from the data offered here. Because there are individuals who do succeed at timing the market. The question is whether they succeed due to skill or luck. . .
Re: Visual proof that investors are bad at timing the market
#5Sounds like BS:
> On the x-axis we show the flow of capital into an asset class
For every buyer, there is a seller, so every single transaction nets out to exactly $0 flowing into the asset class. So exactly how does capital "flow" into or out of an asset class?
You would guess that they are confusing the change in valuation, but that is what they are using for the other axis.
Re: Visual proof that investors are bad at timing the market
#6Sounds like BS: > On the x-axis we show the flow of capital into an asset class For every buyer, there is a seller, so every single transaction nets out to exactly $0 flowing into the asset class. So exactly how does capital "flow" into or out of an asset class? You would guess that they are confusing the change in valuation, but that is what they are using for the other axis.
You sell your stocks (asset class: equity) and someone buys it and gives you cash; then you go and buy treasury bonds (equity class: government bonds). Money flow out of equity into U.S treasury, otherwise known as "flight to safety."
Re: Visual proof that investors are bad at timing the market
#7Sounds like BS: > On the x-axis we show the flow of capital into an asset class For every buyer, there is a seller, so every single transaction nets out to exactly $0 flowing into the asset class. So exactly how does capital "flow" into or out of an asset class? You would guess that they are confusing the change in valuation, but that is what they are using for the other axis.
The x-axis actually shows the flow of cash into mutual funds in the given sector, which we take as a proxy for investor belief in the value of investing in that sector.
Re: Visual proof that investors are bad at timing the market
#8Er, every transaction has both a buyer and a seller – both of whom are investors. If one is timing well, the other is timing poorly – summed over both, the class of all 'investors' can never be winning or losing from timing. Only subsets of investors could.
Re: Visual proof that investors are bad at timing the market
#9Sounds like BS: > On the x-axis we show the flow of capital into an asset class For every buyer, there is a seller, so every single transaction nets out to exactly $0 flowing into the asset class. So exactly how does capital "flow" into or out of an asset class? You would guess that they are confusing the change in valuation, but that is what they are using for the other axis.
You sell your stocks (asset class: equity) and someone buys it and gives you cash; then you go and buy treasury bonds (equity class: government bonds). Money flow out of equity into U.S treasury, otherwise known as "flight to safety."
> You sell your stocks (asset class: equity) and someone buys it and gives you cash;
OK, let's write it out:
Before
Person1: Has $100 cash.
Person2: Has equity worth $100
Person3: Has Tbond worth $100
Person1: Has equity worth $100
Person2: Has $100 cash.
Person3: Has Tbond worth $100
Person1: Has equity worth $100
Person2: Has Tbond worth $100
Person3: Has $100 cash.
Re: Visual proof that investors are bad at timing the market
#10How does outflow of capital from one asset to another measure investor's ability at timing the market? Yes, one pulls out on equity if one predicts that S&P500's going to drop but most of times decisions are made based on the volatility and risk tolerance. A retirement fund with a closer retirement date or income/growth fund will pull out if they find the risk/volatility level of the general market to be unacceptable…
Good data for the performance of hedge funds as an asset class that account for survivorship bias is somewhat hard to find. Off hand, Swensen in "Unconventional Success" recounts that for a single decade period that he was looking at, third quartile managers matched the market before fees. So after the standard hedge fund fees investors in those funds underperformed the market by about 1.6% (in his specific decade-ending-dec-2003 time series example).
Looking backwards, you can always identify fund managers that beat the market, but only in hindsight. One big part of this that's left unsaid is that yes it's possible to find managers to beat the market in hindsight, it's finding these managers ahead of time that's difficult & unlikely. Coupled with how much you'll trail the market if you try and don't succeed in finding outperformers ahead of time, it's a bit of a losing game to try.
There's an entire other field of study about the persistence of performance, but suffice to say that looking in the rearview mirror for last decade's outperformers doesn't help you find the next decade's outperformers.