Why I Have No Faith in Market Timing

Earlier this week I described the market timing strategy outlined in Mebane Faber’s book The Ivy Portfolio. I chose not to editorialize too much, preferring instead to simply explain the strategy to readers who may have been unfamiliar with it. So let me make my opinion on this clear now: I do not recommend this strategy or any other form of market timing. I simply don’t believe it will help investors improve their long-term returns.

Let’s start with the obvious point. The performance numbers in Faber’s book (which show a 1.5% boost in returns and much lower volatility since 1973) assume that costs and taxes were zero. But as Larry Swedroe is fond of saying, strategies have no costs, but executing them does. Trading commissions and bid-ask spreads would likely be low with Faber’s strategy, but they will certainly reduce that outperformance. More importantly, in a non-registered account taxes would severely cut into the returns of a timing strategy. (Obviously, in an RRSP this is not an issue.)

Do you have the discipline?

But the real problem with timing strategies is not the costs: it’s behaviour. Faber freely acknowledges that the most important factor in any quantitative strategy is the discipline to pull the trigger, which “is not as easy as it sounds.” The impressive performance of the timing strategy is a backtested result that not only assumes no costs or taxes, but also that the investor executed every trade with robotic, unemotional precision. Very few investors have anything approaching that kind of discipline. Acknowledging this, Faber includes a telling quote from Richard Dennis, creator of the Turtle Trading system:

I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.

Make no mistake, there are times when all strategies go bad. In fact, the data on Faber’s website shows that the timing model has underperformed in three of the five asset classes since late 2009 (until a couple of months ago, it trailed in all five). Faber’s firm also manages an ETF that uses the strategy, and it is down more than 6% since its inception in November 2010, a period when balanced portfolios delivered positive returns. That’s a short time frame, but you need to ask yourself how patient you will be with a strategy that is significantly lagging the markets. The evidence suggests the patience of active investors tends to last about one to three years.

A good time for timing

Last summer I wrote a series of posts about the Permanent Portfolio, another strategy that promises to protect investors from large drawdowns. Many readers were enamored with the idea of holding 25% in gold, but that’s an easy call after seven years of staggeringly good returns for that asset class. Where were the investors advocating this strategy during the 1980s and 1990s, when gold delivered dismal returns while stocks were compounding at 10% to 12%? The fact is, everyone loves a winner, but few have the resolve to stick with a strategy when it trails the market for several years in a row.

It’s no accident that timing strategies are getting a lot of interest now, with the memory of 2008 still fresh in investors’ minds. Who doesn’t wish they could have avoided that horrendous event? But at some point in the future we’ll have another bull market that lasts three or four years, maybe more. Timing strategies are guaranteed to underperform during prolonged bull markets (as they did throughout the 1990s and in the mid-2000s). That’s when we will see how many investors truly have the discipline to follow them. My sense is this number will be exceedingly small.

About a year ago, Norm Rothery wrote an article about momentum investing for MoneySense, and he summed up his analysis this way:

Perhaps the biggest knock against technical investing is the paucity of investors who have done well following it over many years. Indeed, we have a very hard time finding technical investors with strong, verifiable, multi-year performance records. If you’re out there, please let us know.

47 Responses to Why I Have No Faith in Market Timing

  1. TheSPYsurfer May 17, 2012 at 1:13 pm #

    Thanks for the article.

    I personally use the 10-SMA method combined with a 6-month RS (“rotation system” as mentioned in Faber’s book) as well as volatility and correlation parameters.
    Totally agree that the toughest part is to stick to your plan…

  2. Michael James May 17, 2012 at 1:31 pm #

    I think I could muster the discipline to follow Faber’s approach if I believed it would work well ino the future, but I’m not convinced that it will. I need some plausible reason to believe that it will continue to work. Perhaps this reason is descibed in Faber’s book, but I haven’t read it yet.

    The reason I invest in equities (as a buy-and-hold investor) is because I believe that the volatility premium is likely to remain high because most people will remain short-sighted. I need a similar plausible explanation of why any other investing strategy is likely to work into the future.

  3. Sina May 17, 2012 at 1:53 pm #

    And there is something else: time! With buy and hold I dont need to invest any time, I dont need to read a lot on financial market, I dont need to worry….the best is I just ignore the fact I have invested in stocks. Every year I rebalance a little, look around for some new ETFs that maybe cheaper and thats it.

    Time is a huge investment especially in todays world and its much more worth than some, however rather unlikely, improvements on the ROI.

  4. Jon Evan May 17, 2012 at 2:27 pm #

    In your previous article you state this as a fact that between 1900 and 2008: “the timing strategy produced higher returns with much lower volatility, while avoiding the largest drawdowns.” Given such overwhelming evidence I remain surprised by your denial of it simply because you think investors would lack the discipline required. Critics of the buy and hold investment strategy like Gordon Pape likewise use the same argument that most investors lack the discipline required to buy overpriced assets and hold them when the markets are tanking! For me the prospect of avoiding a major drawdown would be an incredible incentive to develop the needed disciple for Faber’s strategy.

  5. Andrew F May 17, 2012 at 2:36 pm #

    Buy-and-hold is possibly more emotionally difficult to execute than a timing strategy like Faber’s. How many DIY buy-and-holders sold at the bottom in March 2009, convinced that the world was coming to an end?

    Your second paragraph essentially concedes that Faber’s strategy would outperform in a registered account. The outperformance is significant on a risk-adjusted basis.

    The strategy tends to lag at the beginning of bull runs, matches performance during long term bull trends, and significantly outperform during crashes. Basing assessments of the strategy’s merits on late 2009 to present does not seem reasonable to me. It’s like concluding that couch potato portfolios don’t work because T-bills outperformed the portfolio over a 5 or 10 year period. You have to at least allow one market cycle (peak to peak or trough to trough) to asses performance. Say 2000- 2008, or 2003 – 2009.

  6. Canadian Couch Potato May 17, 2012 at 2:52 pm #

    @Jon: Let me clarify: between 1900 and 2008, the timing strategy would have produced higher returns if it had zero costs, zero taxes and was executed perfectly for 109 years. There are countless other strategies that would have beaten the market over the same period with these same conditions. This is not evidence, it is backtesting.

    There is no question that a passive strategy also requires discipline. However there is a good deal of evidence (which I will write about soon) that passive investors tend to stick to the strategy more consistently. Part of this has to do with mindset and expectations. I know that markets will decline dramatically, and I know my index funds will fall at the same rate, so when that happens I don’t think “this isn’t working,” because it’s doing exactly what it’s supposed to do. I simply choose as asset allocation with a volatility I can live with. I did not waver from this in 2008-09, as unpleasant as that was.

    With active strategies, there is a different expectation. When the market is up two years in a row, and your “defensive” strategy is down, it is natural to feel like you’re not getting what you were promised. Actively managed funds experience major outflows when they have a couple of bad years, even if those were preceded by five or six good years.

    I appreciate that you don’t have confidence in the Couch Potato strategy, and that is fine. It’s not for everyone. But I think you need to demonstrate that you have followed an alternative strategy for many years before throwing your support behind it. Try the Permanent Portfolio or Faber’s strategy for four or five years and see if it’s any easier. I really think it’s important to put your own money into any strategy you advocate.

  7. Mike May 17, 2012 at 3:05 pm #

    What is your best guess for how much taxes would cut into Mebane’s performance numbers in non-registered accounts?

  8. Canadian Couch Potato May 17, 2012 at 3:15 pm #

    @Andrew F: I agree that buy-and-hold can be emotionally difficult, too, but I think it would be hard to argue that repeatedly jumping in and out of the market would be easier for most people. Some, sure, but not most. I have spoken to many investors who are paralyzed with indecision during market volatility, and who would second-guess every decision that doesn’t work out in the short term.

    I don’t know what proportion of passive investors sold everything at the market bottom in 2009 (or a few months before that). But I would guess that it was lower than the proportion of active investors who did so. And those who did panic had an inappropriate asset allocation, because 50% drawdowns in equities have happened before, will happen again, and one must be willing to accept them.

    http://canadiancouchpotato.com/2010/11/10/ready-willing-and-able-to-take-risk/
    http://canadiancouchpotato.com/2011/08/09/do-you-have-the-right-asset-allocation/

  9. Canadian Couch Potato May 17, 2012 at 3:26 pm #

    @Mike: Faber gives an estimate of the taxes in his book. He estimates that simple rebalancing would result in 20% annual turnover, versus 70% for timing strategy. He cites a study showing that the higher turnover would cause an extra tax drag of 50 basis points, which frankly seems low to me. Keep in mind this is based on the US system, which has different tax rates for short-term (less than one year) and long-term capital gains. I don’t know how this would play out in Canada where we do not make that distinction.

  10. Andrew May 17, 2012 at 8:29 pm #

    This is the way I look at this issue – if there was an annual 38% drawdown or 50% peak to trough drawdown (as in the financial crisis) how would I feel about such a loss not in relative terms (%) but absolute terms ($) ? Losing 50% of $5000 when you are 25 is a nasty $2500 which may be 10% of your salary. You have 40 years to make up the loss. Losing 50% of $150K when you are 55 (after saving 10-15% of your salary for 30 years) is an entirely different matter both practically and psychologically.

    For savers, who work hard and sacrifice to save, as the size of your portfolio grows you will feel less and less willing to put money at risk – which is good because 80 year olds shouldn’t be 70% equities. But what about that risky time when you may have saved a lot but are still accumulating (say 45-60 years) and still are in risk assets (say half) How will you respond if the market starts to tank?

    Having a sense of control – even if it is at the margins – may also help keep people invested .

    As CP investors accounts grow in size and they get older I bet being carefree about holding and rebalancing, particularly in times of maximum stress, will not be how people will behave. Flow of funds data supports this; retail investors have not been in the equity markets since the crash and are loaded up on bonds.

  11. Canadian Couch Potato May 17, 2012 at 10:20 pm #

    @Andrew: I agree with you completely when you say that a huge drawdown is far more devastating when you have a large portfolio and/or are close to retirement. But I would make two arguments in response. First, there is no guarantee that a timing strategy will protect you from this. The table on page 144 of Faber’s book indicates that even the timing strategy had a 50.31% drawdown and a –26.87% calendar year. And I don’t think it would have avoided the –22% loss on Black Monday in 1987 (I could be wrong about this: I don’t remember this being discussed in the book). So there is a presumption that timing will protect you from catastrophic loss, but that is not necessarily the case. The sense of control is an illusion. (At least with protective puts you are guaranteed not to suffer a catastrophic loss.)

    The other issue is that investors need to have realistic expectations. Warren Buffett has said that if you are not prepared to lose half your money, then you should not be invested in equities, and I agree. We know that stocks can lose 50% and we can’t pretend we’re surprised when that happens. Even with a 50-50 portfolio you should be prepared to lose 20% to 25%. If you are not prepared to endure that, then you need a more conservative asset allocation.

    People seem to be looking for a way to get equity-like returns without equity-like risk. I wish that were possible, but I don’t believe it is. I can’t stomach a 100% equity portfolio either, so I hold 30% in bonds even though I’m at least 20 years from retirement. I will certainly dial that down further as I get older. With my shorter-term money (RESPs) I have much lower equity allocations. Yes, the returns are low, but that is the price of safety.

  12. TheSPYsurfer May 17, 2012 at 11:02 pm #

    Page 144 indeed shows a max drawdown of -50.31% and a -26.87% worst year for the 10-M model. The same table shows a -83.66% max drawdown and a -43.86% worst year for the S&P500 buy&hold. That puts things into perspective, eh?
    The overall idea is that you might beat the index with the timing method (not by much though) but you will sleep better (risk reduction.)

  13. TheSPYsurfer May 17, 2012 at 11:24 pm #

    Let’s not forget that Faber then explains how to break down the index by using less correlated ETFs (5/10/20 ETF portfolios.) The method is here to download for free: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

  14. Andrew F May 18, 2012 at 12:36 am #

    CCP:

    The only negative year for Faber’s 5 asset class timing model from 1973 – 2008 (from the updated paper) was -0.39% in 2008. Buy and hold for the same asset classes has a worst annual performance of -30% in 2008.

    I think the figures you used for a 50% drawdown refers to timing applied only to stocks. A diversified portfolio as Faber suggests is more robust. His timing portfolio had positive returns in 1987.

    As far as taxes, here is what Faber says in his paper:

    “Taxes, on the other hand, are a very real consideration. Many institutional investors such as endowments and pension funds enjoy tax-exempt status. The obvious solution for individuals is to trade the system in a tax-deferred account such as an IRA or 401(k).
    Due to the various capital gains rates for different investors (as well as varying tax rates across time, as well as the impact of dividends) it is difficult to estimate the hit an investor would suffer from trading this system in a taxable account. Most investors
    rebalance their holdings periodically and introduce some turnover into the portfolio – and it is reasonable to assume a normal turnover of approximately 20%. The system has a turnover of almost 70%.
    Gannon and Blum (2006) presented after-tax returns for individuals invested in the S&P 500 since 1961 in the highest tax bracket. After-tax returns to investors with 20% turnover would have fallen to 6.72% from a pre-tax return of 10.62%. They estimate that an increase in turnover from 20%-70% would have resulted in an additional haircut of less than 50 basis points to 6.27%.”

    So clearly this is better implemented in a registered account, but it is not so obvious that the marginal tax hit outweighs the benefits for investors facing a high marginal rate (who are likeliest to be investing outside of a registered account).

    I think your strongest criticism is how easy it is to execute. I expect trend-following ETFs to address that concern nicely, but it will likely take time for that market to develop.

  15. Canadian Couch Potato May 18, 2012 at 1:09 am #

    @Andrew F: Yes, we do have to make sure we compare apples to apples here. The five-asset-class portfolio did not experience a 50% drawdown: that was for stocks only. And for the record, the S&P 500 returned 5.2% in 1987, despite Black Monday. Hard to believe!

    Interestingly, in the book and the paper, the only negative year since 1973 for the timing strategy was 2008, as you say. But the ETF was down over 7% in 2011.

    I respect everyone’s opinion in this matter and I’ll step aside now. Thanks to everyone for a healthy debate.

  16. Andrew May 18, 2012 at 9:42 am #

    Dan
    I agree that it may be offering only a marginal benefit or even an illusion of control. I also agree about expectations. Don’t be in equities unless you are prepared for a deflationary depression (50% sustained loss in value). I said this to an advisor, a CFA, and she laughed at me and said it was not possible. This was in reference to how to discuss asset allocation with a client; I said you need to make it clear in dollar numbers not percents, that the amount in equities could some day be cut in half because it has happened before. Since this would probably scare off most investors, or lead to a tiny allocation to equities, she stuck to claiming the worst case in any given year should be based on standard deviation. Then such a loss happened and fortunately it has not persisted – but it could.

    I also talked to a big bank VP during the financial crisis. He said that clients had lost so much money that they would be forced to take on more risk and they were therefore looking at designing new “products” (PPNs) that could do this trick. The kind that have a guarantee, and some form of equity participation, and 4% hidden fees.

    So it is all about expectations and one of my rules for risk management is “anticipate regret”. I also know that the pain of a loss is given more emotional weight than the good feeling of a gain – maybe twice as much. A financial loss is really like a physical injury. So even though I know I will sometimes have regrets I need to do something to maybe reduce that regret, even marginally. That, and the dynamics of equity markets – particularly how they tend to top, nudge me toward using a signal to reduce equity or to hedge the beta of the equity to maybe, maybe, lessen the chance of and the amount of a drawdown.

  17. Canadian Couch Potato May 18, 2012 at 9:55 am #

    @Andrew: Well, you can see why some investors have unrealistic expectations based on advice like that! I don’t like to dwell on it either, but we can’t stick our heads in the sand and think that a 50% drawdown isn’t possible when it has happened several times before. This isn’t even a “black swan”: it’s something you should fully expect will happen in your lifetime.

    At least the industry offers wonderful solutions like PPNs to protect us. 🙂

  18. Francis May 18, 2012 at 10:26 am #

    I am really disapointed that you recommanded a book and in the next post you destroy the strategy, I buy the book on your last post, and now I am not sure I will read it and I fell like if I waste my money.

  19. Canadian Couch Potato May 18, 2012 at 10:33 am #

    @Francis: I’m sorry, I didn’t mean to mislead. I still recommend the book: I learned a lot from reading it, and the first two-thirds of it are quite consistent with the Couch Potato strategy. I just don’t think it can be enhanced by adding a timing element.

    I have to say I’ve been surprised by how many of my readers seem deeply drawn to timing strategies, and how few seem to share my skepticism (at least among those who have commented). Here I was thinking that most of my posts are preaching to the choir!

  20. Michael James May 18, 2012 at 10:47 am #

    I suspect that some of those drawn to timing strategies think of themselves as part of the choir. Many people just don’t seem to see the contradictions. I remember one co-worker back in the dot-com era who frequently sought me out to chat about stocks (back then I was a stock-picker). He would say he was thinking of investing in some company I thought was terrible (Pets.com in one case). I would say something wishy-washy like “this is a terrible idea; you’re going to lose all your money.” Then he’d talk for a while and eventually leave my office thinking I agreed with his stock pick. To this day I’m sure he thinks the two of us were on the same wavelength.

    Another good example is discussion of interest rates:

    Fixed-income investor: “What do you think will happen to interest rates?”
    Me: “I don’t know, and I don’t believe anyone else knows either. I think it’s impossible to accurately predict future interest rates.”
    Fixed-income investor: “Of course you’re right. I really need more income. But, really, tell me, when do you think interest rates will go up?”

  21. Andrew F May 18, 2012 at 11:00 am #

    I’m not convinced that Faber’s timing strategy is superior to buy-and-hold. But I am not convinced that it is worse, either. The analysis is pretty compelling. He has done plenty of out of sample testing. What remains is to develop a track-record in the real world. His ETF has had a less than stellar first 18 months, but that time frame is too short to make conclusive judgements. I do not invest in his ETF.

    Any thoughts on Managed Futures as an asset class? It is also fundamentally a timing strategy, and has produced impressive real results.

  22. Rick Coyle May 18, 2012 at 11:58 am #

    What a great discussion with excellent points made by both sides. I have to admit that in the past I advocated buy and hold with annual rebalancing but after the major drawdown 2008-2009 I became more interested in technical analysis as a way to manage risk. I believe it does take discipline and nerve to implement a technical analysis strategy. I like the idea of reducing equity holdings by 50% when the indicators say sell and moving back to the target mix when they say buy. This way you are never completely out but you are reducing exposure. I have to admit that it is not always easy to confidently read the signals as I use moving averages as well as some oscilators for confirmation. I think that before you implement any technical analysis strategies that you do a lot of research and practice virtually because you have to be confidant in the moves you make, as just like in athletics you can’t be tentative. And remember that strategies that worked in the past may not necessarily work in the future so you can’t be 100% certain any pattern is going to repeat. Buy a respected text on the subject such as Technical Analysis: The Complete Resource by Dalquist and Kirkpatrick and you will quickly come to the realization that it is as much art as science. Hey there are no guarantees or certainties here.

  23. Doug Cronk May 18, 2012 at 1:51 pm #

    Hi, Dan.
    Market volatility got you down … then up, then down again? The best defence is a rebalancing discipline. (aka. Buy Low Sell High Made Easy?)

    The temptation to market time is no less in the Institutional Investing world. But it’s very much frowned upon. (Making ‘bets’ with pensioners money is, uhm, discouraged). A rebalancing strategy, however, can help overcome the behavioural biases of market timing.

    Here’s one of my favourite quotes on the subject:
    “Contrarian strategies [rebalancing] will outperform buy-and-hold strategies in markets that experience frequent reversals (so-called sideways markets). [The] rationale for frequent rebalancing is a belief that markets in the future will tend to move sideways more often than they trend.” Susan Trammell, Nov/Dec 2011, ‘Adaptive Asset Allocation’, CFA Magazine, Vol. 22, No. 6: 47-49.

  24. Andrew May 18, 2012 at 2:15 pm #

    Doug
    How often do you think rebalancing should be done? Bernstein in Investors Manifesto recommends every 2-3 years I think.
    Pension funds do not play with money like some advisors do but they do tactically vary asset allocations within a range which is a form of market timing. For instance OTPP has been gradually increasing its exposure to inflation sensitive assets. They also use a number of alpha strategies.
    Now the “Norway Model” sovereign wealth fund – the largest pool of money in the world is moving away from alpha strategies toward a kind of CP portfolio of a type of indexing, a long horizon, low fees and rebalancing. This paper describes it:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1936806

  25. Canadian Couch Potato May 18, 2012 at 3:08 pm #

    @Doug: Always great when you stop by with the institutional perspective! For readers who are interested, I have uploaded a PDF of the article Doug referred to.

    @Andrew: Thanks for the Norway Model link.

  26. Doug Cronk May 18, 2012 at 3:22 pm #

    Good question.
    There’s theory and then there’s practical implementation.
    Many Pensions rebalance monthly as part of their cash flow work. And they move in increments back toward the strategic mix … not all at once. And over the last few years, it’s added value. (Like 0.50% … ish).
    For Individuals it might be less a function of time (when) and moreso a function of how much the market(s) have moved.
    The trick, I think, for Individual Investors is to make the (too often) complex rebalancing discipline … practical. So rebalance with an RRSP contribution for example or quarterly after dividends, interest and/or rent has been received. (Reinvesting income is also a form of rebalancing). Again, rebalancing works best in a sideways market. Some could set ‘bands’ around the strategic mix … like 5% + or -. Or after a 10% market correction. Or as market PE hits 10. Or, for example, I might rebalance into REITs when yields hit 7%.
    The default position for Individuals? 1/2 now. 1/2 later.

  27. Mike May 19, 2012 at 11:09 am #

    One big thing about this strategy that may be a huge alpha generator for some and a huge drag on the account for others is that is often has large components sitting in cash. With that cash one could trade and if they know what they are doing, increase their returns. On the flip side, if you are not a skilled trader this ability to trade with the excess cash may be a net negative.

  28. Doug Cronk May 19, 2012 at 12:59 pm #

    Mike,
    A rebalancing policy and reinvestment discipline can help minimize cash drag … but if you are going to be a market timer … you have to have cash available to take advantage of opportunities.

  29. Mike May 21, 2012 at 2:34 pm #

    I have a question, I currently have the following portfolio:

    40% – VSB
    20% – VXUS
    20% – VTI
    20% – VCE (Vanguard MSCI Canada Index ETF)

    Since VXUS is 8% North American and covers many CDN stocks, is it necessary to have 20% VCE?

  30. Canadian Couch Potato May 21, 2012 at 2:58 pm #

    @Mike: I would not be concerned about this. Remember that asset allocation is not an exact science: close is good enough. If VXUS makes up 20% of your portfolio, than the Canadian portion of it represents a trivial 1.6% of your overall holdings. Don’t sweat it.

  31. Mike May 21, 2012 at 3:21 pm #

    Thanks for your answer, I guess to be more specific, do I need VCE at all? Would VSB, VXUS, and VTI cover off all the bases? It would save me 4 commissions per yr, as I add new funds quarterly. Not a big thing, but was just wondering. Thanks.

    Canadian Couch Potato May 21, 2012 at 2:58 pm
    @Mike: I would not be concerned about this. Remember that asset allocation is not an exact science: close is good enough. If VXUS makes up 20% of your portfolio, than the Canadian portion of it represents a trivial 1.6% of your overall holdings. Don’t sweat it.

  32. Canadian Couch Potato May 21, 2012 at 3:31 pm #

    @Mike: Sorry I misunderstood your question. The decision to hold a “market portfolio” (that is, holding each country in more or less the same proportion as the size of its stock market, with no home bias) is perfectly sensible in theory. There are some practical considerations, though, such as currency exposure, taxes, trading costs, etc. You’ve given me a good idea for a blog post: check back tomorrow for the complete answer!

    If you do decide to go this route, consider Vanguard’s VT for a one-stop solution. The lower trading costs will probably offset the higher MER:
    https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT

  33. Mike May 23, 2012 at 12:13 pm #

    Thanks for answering my question. I read your latest blog, Ask the Spud: Does Home Bias Ever Make Sense?, and I think that I am going to stay with the following allocation:
    40% – VSB
    20% – VXUS
    20% – VTI
    20% – VCE

    the overall MER is .13 and I am comfortable long term with this portfolio. As always, keep up the good work and I look forward to reading your blog. Mike

  34. Canadian Couch Potato May 23, 2012 at 12:20 pm #

    @Mike: Thanks, glad you found it helpful. You’ve got an extremely well diversified and super-cheap portfolio that should serve you well over the long term. Good luck!

  35. Nicholas Pino May 25, 2012 at 4:19 pm #

    My Portfolio:

    spr316……$5000.00(Sprott Silver Bullion Fund) 1.71%
    spr216……$5000.00(Sprott Gold Bullion Fund) 1.10%
    TDB900…..$3000.00(TD Candian Index Fund) 0.33%
    TDB909…..$2000.00(TD Canadian Bond Index) 0.51%

  36. Phil Kanter May 25, 2012 at 4:30 pm #

    In all of these discussions, there is the assumption that we are trying to “beat the market.” I am happy with moderate returns and some promise of missing the really bad dips. I happen to have been using Faber’s strategy in 2008 and missed that downturn. Lately, the strategy has, in the main, produced lackluster results, but, frankly, so have the markets overall. The long and the short of it is that I am close to retirement now and appreciate a strategy that keeps me out of deep market downturns.

  37. Canadian Couch Potato May 25, 2012 at 6:04 pm #

    @Phil: Fair point: it’s true that some market timers are just looking for less volatility, even if it means slightly lower returns.

    In the end, I think we all want the same thing: returns that help us meet our goals, and a risk level that won’t keep us awake at night. My argument would be that if you are willing to give up some upside in exchange for safety (and most of us are) then the most efficient way to achieve that is through asset allocation. A balanced 50-50 portfolio would have lost about 15% in 2008, which is a number I think most people can live with. And remember, a market timing strategy will not guarantee that you will be safe from a bigger drawdown than that: even Faber’s backtested strategy saw some large losses.

  38. TheSPYsurfer May 25, 2012 at 7:09 pm #

    Balanced portfolio does not necessarily mean balanced volatility though. In fact the stock portion of a 60-40 portfolio can contribute over 80% of the total portfolio volatility on average and over 90% of the portfolio volatility 5% of the time: http://advisorperspectives.com/dshort/guest/BP-120514-Adaptive-Asset-Allocation.php

  39. Oldie July 18, 2012 at 12:10 pm #

    @CCP:

    If you think you have been misleading, don’t be. As a rank beginner starting in June, I have started to read the more recent posts going backwards, which is why I am only going over the May posts and discussions now. As a recent acolyte to Couch Potato-ism, I am drawn to this website expecting some further education in the subject, including some around the edges discussion of topics that relate to Passive Investing, but deviate sometimes, in some manner, away from the main thrust of Passive Investing. The intent, I presume, is to generate thoughtful discussion, even debate, in order to challenge the underlying tenets of the merits of Passive Investing, and if the challenge is intellectually successful i.e. enough to destroy the logic of Passive Investing, then, I guess we’ll have to adopt the philosophy of the successful Challenger. But it works both ways, and, while acknowledging my own bias, after all, I’ve invested time and effort in following the CP website, I have not come across any persuasive enough arguments to abandon the underlying assumptions of the CP principle.

    One of the most basic CP tenets is that attempts to time the market are futile and self-defeating. Initially, I was a little puzzled as you introduced the “Ivy Portfolio” and what was increasingly obviously the market timing strategy embodied in the book’s investment method. This was so obviously out of keeping with what I know to be your philosophy that it was puzzling rather than misleading.

    Then when the independent posters started getting into the animated discussion about the relative merits of this formula over that formula in warning the investor when to get out, or to get in, firstly, I wondered what was going on and briefly thought about carefully following the math involved to be able to come to an intelligent independent conclusion, then I realized that this was the very antithesis of the CP ideal — don’t get carried away with your mathematical genius, as no other genius in the past has consistently parleyed his genius into verifiable, consistent and reproducible superior returns over the underlying market over the long haul. So I didn’t bother. That’s when I noticed you were conspicuously silent throughout this barrage of posting, and started to guess that you were letting the dissenters having their say while preparing your rebuttal/statement of principle. Your essay this week confirms my impression. You have hardly ever, if at all, been inconsistent as far as I can see. At worst, the format of this latest discussion topic was spread over 2 of your posts, allowing some surfers who didn’t fully understand the underlying CP philosophy, and who also didn’t understand that this was a forum open also to non-believers (or at least non-true-blue-believers), who seemed to dominate the earlier session’s discussion, to get temporarily disoriented.

    I was going to ask the question of you — are you introducing the book because you think that there are some timing elements in the book that can be usefully embodied into the CP method to “fine-tune it”, or is this another object lesson in how yet one more very reasonable-sounding and emotionally intuitive propositions such as “there must be a mathematical formula that can protect us timing-wise from disasters such as the one we’ve just been through” can erode and basically destroy the merits of the Couch Potato system. I suspect it’s the latter. In fact, I should ask an even more extreme question, is there anything more than zero weighting that you would allow timing advice (I’m not talking about time horizons of the individual investor’s situation) from this book or any other source to modify any of your CP portfolio asset distribution or choices?

  40. Joe March 27, 2013 at 1:38 pm #

    Hi all. Very interesting discussion! I’ve read a lot of this blog over the past 5 years, and my wife and I have made the leap and gone into RBC to set up Direct Investing accounts. We have 5 accounts to juggle: 1 RSSP & TFSA each, and 1 open. I’m using Dan and Justin’s multiple account rebalancing spreadsheet and tax considerations to figure out what $$ will fit where. We’ll incorporate the funds suggested in the Complete Couch Potato to ready ourselves for retirement in 8 years. So far, thanks very much.

    Here’s my question. You’ve discussed market timing above, but what’s the feeling about jumping headfirst into VTI and VXUS after their recent remarkable years? It seems like some correction must be due. Would you wait to jump in until a spring sell-off: the “sell in May and go away.” Would you invest proportions in some timely manner? Would you just do a limit order, hoping for a 5% drop?

    We’ll be putting years of saving and $40K per fund on the line. I understand the timing argument, but shouldn’t there also be a live-prudently argument?

  41. Canadian Couch Potato March 27, 2013 at 3:57 pm #

    @Joe: Thanks for the comment. I appreciate that it doesn’t feel right to buy into an asset class after it has gone up substantially. But no matter how you frame the question, it always comes down to market timing. What if the market rises another 10% before it corrects? What if you buy in after a 5% dip and the markets fall another 15% after that? You can only identify the right time to buy or sell in hindsight.

    Long-term investors should determine an appropriate asset allocation and stick to it all times. When markets move substantially higher or lower, you can rebalance to get back to those original targets. Otherwise you’re just guessing.

    http://canadiancouchpotato.com/2013/02/07/scary-when-theyre-down-scary-when-theyre-up/

  42. hans January 2, 2014 at 6:37 pm #

    Michael James:”The reason I invest in equities (as a buy-and-hold investor) is because I believe that the volatility premium is likely to remain high because most people will remain short-sighted.”

    It sounds like you are very comfortable with the concept and application of index
    investing as a buy and hold approach and that’s good.
    However I’ like to make a small correction to your statement so that others are not confused.
    Buy and hold index investing has very little if anything to do with extracting the volatility premium. The chief source of index returns is from the Equity Premium.

  43. Michael James January 2, 2014 at 8:07 pm #

    @Hans: The equity risk premium (http://www.investopedia.com/terms/e/equityriskpremium.asp) is just a special case of volatility risk premium (en.wikipedia.org/wiki/Volatility_risk_premium), which is any volatility that can’t be diversified away. As I see it, you just told me I don’t have a car; I have a Lexus. If you don’t see it that way, then please explain it to me.

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