Dr. Kris

Market Timing Buries 'Buy and Hold' in Asset Allocation

To CM in MA:

Thanks for your insightful comments. Here's a response to the points you brought up:

- Were transaction costs and taxes taken into account when calculating the returns?

No. These are, of course, different for everyone. Within a mutual fund family the occasional movement in and out of an asset class can be done without charge. As to taxes, if you are holding your investments in an IRA there are none. Outside of an IRA you will be paying taxes on realized gains at a rate that depends on many things but that is still preferable to loss of principal. Taxes must be paid sometime. It's one of the two things you can be certain about.

BTW, the SMC Analyzer does have the capability of adding these parameters along with others such as margin costs and account interest.

- What is meant by the "averaging period is re-optimized every month?"

This refers to the portfolio growth graph which is essentially a backtest of following the market timing versus the buy and hold strategies each month and then reaping the results of following the recommendations. Every month with the addition of new data the averaging period of the CCI for each asset class is re-optimized to maximize the effectiveness of its use in terms of portfolio growth.

- Does it worry you that two assets with the following monthly Hi-Low-Close data (55, 45, 50; 100, 20, 30) yield the same "typical price" input into the CCI calculation? If these assets then had following months of (50, 40, 45; 70, 25, 40), the "typical prices" would again be the same for that month. Carry this on long enough and the deviations from the moving averages also become the same. Likely, perhaps not. But it raises the possibility that a very volatile asset can masquerade as a far less volatile asset. Would this affect your strategy?

First of all, we are using asset classes here composed of many individual components hence the volatility intra-month should theoretically be dampened. Nevertheless, the analyzer uses only closing prices as a substitute for typical price. You do bring up an important point however. That sampling the performance of an asset class only at periodic intervals has a nonzero probability of misunderstanding its true characteristics. With 80+ years of monthly data available however there is a high confidence that the volatility of the asset classes used in the analysis is properly represented.