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Should I be trying to time the markets while diversifying my assets?
Market timing is the act of attempting to predict the future direction of a market, typically through the use of technical indicators or economic data. Although many authorities believe that it is impossible to time the market, there is considerable opinion to the contrary. What can be said with certainty is that it is very difficult to be successful at market timing over the long run, and the average investor doesn’t have the time or expertise to make market timing a viable strategy.
The opponents of market timing point out, correctly, that the financial markets are fairly efficient and, therefore, there is little to be gained from attempting to time them. Furthermore, the lost opportunity caused by missing a bull market and the significant losses from getting caught in a bear market require that much more than 50% of a market timer’s predictions be correct in order to benefit from the strategy.
When making the decision to diversify into tangible assets, market timing is usually a fruitless pursuit. The idea someone can correctly market time his or her diversification plan in tangible assets runs contrary to the idea of asset diversification in the first place. Think about the number of times you’ve considered or acted on jumping in and out of gold stocks to attempt to hit highs and lows in the markets. Has all that work produced a better return over the same period?
Blanchard and Company, Inc.’s advice to all of our clients is to remove the “market timing” mentality from your investments and focus more on the benefits of diversification, especially during volatile economic times such as the present. The sooner a decision is made to diversify assets, the sooner you can begin benefiting from that decision.
The chart below is taken from Professor Raymond Lombra’s work on the investment performance of gold and rare U.S. coins in a diversified portfolio. The report underlines the desirability of diversifying a tangible asset portfolio with both precious metals and rare coins. In 2004, when gold had a relatively flat move over the course of the year, rare coins more than made up for that small percentage increase by having an appreciable increase of +14%,+13% and +14%. When gold moved up 17.8% this past year, rare coins still had a solid appreciation of +6%, +3.5% and +5%. This is a testament to the power of diversification within a tangible asset portfolio.
| Year |
2004 |
2005 |
Average Return 2004-2005 |
Average Return 1979-2005 |
| Gold Return Jan-Dec (London Gold Price from IMF) |
4.8000 |
17.8000 |
11.3 |
3.7640 |
| Stock Market Return (Compilation of NYSE, AMEX and NASDAQ) |
11.9000 |
6.1000 |
9.00 |
13.3659 |
| 3 month T-Bill return, 1st week Jan, from Federal Reserve |
0.9000 |
2.2900 |
1.595 |
6.1007 |
| Treasury Bonds-source: Global Financial Data & Bloomberg |
8.0000 |
3.0500 |
5.525 |
10.5241 |
| Rare coin returns-All coin types: grades XF to MS65-Weighted per Penn State Study |
14.1956 |
6.1013 |
10.148 |
9.9987 |
| Rare coin returns-All coin types: MS65 |
13.5977 |
3.5353 |
8.566 |
13.67 |
| Rare coin returns-All coin types, MS 63, 64, 65. |
14.2650 |
5.0379 |
9.651 |
11.629 |
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