index

Timed Index Investing: What is it?

Recent surveys show that large numbers of investors, across all age groups, are either out of one of history's biggest bull markets out of fear or are extremely disappointed with their current investment situations and distrustful and lacking confidence in their present financial advisors.

These investors have bitter memories of the turbulent ups and devastating downs of the bear markets of 2000 and 2008. Huge losses that take years to recover to just a break-even point is a traumatic experience. Many investors have dread or no longer have the stomach to experience the roller coaster of the markets.

Do you have money in a brokerage account? Or an IRA or a 401(k) or other retirement accounts? You now have a powerful and safe way to invest with a broad equities index fund -- an ETF or mutual fund -- that is timed to the market, in both up and down trends, protected against the devastating volatilities of the stock market.

Index funds eliminate the thankless tasks of trying to pick winning stocks or finding managed funds that inevitably do not deliver in the long term their mission of beating or even keeping up with the market.

With an index fund you are invested in dozens or even hundreds of companies with the convenience, simplicity and reduced expense of a single security that tracks the stock market. A broad index fund (an ETF or mutual fund) can be chosen that tracks one of the major indices: the DJIA, S&P 500, NASDAQ and Russell 2000. With a single index fund's sizeable number and variety of holdings you also have diversification to minimize risk.

Index funds are better than managed funds because managed funds have been a failure, having historically underperformed the market. Index funds, on the other hand, mirror the market, which, untouched, has outperformed most attempts to manage portfolios consisting of various selected securities. And index funds have lower management and operational fees and costs, and are potentially more tax efficient.

As an alternative to managed-fund investing, conventional index fund investing is called passive investing. But timed index investing is not passive investing; it is an alternative to passive index investing whose time has come. Instead of buying and holding index funds, timed index investing is an active form of portfolio management: periodic buying and selling, entering and exiting, based on market conditions, maximizing both returns and safety in up and down markets.

How is this market timing done? It's accomplished with technical indicators that signal when an up or down trend is in place and when it is ending. The result is far superior to just buying and holding through volatile and unproductive up and down swings of the market.

Is market timing for everyone?

Unlike passive index fund investing, market timing is not a do-it-yourself method of investing. Most investors do not know how to time the market and fail at it. The solution is to use a market timing service that has a proven track record over an extended period of time.

Timed index investing combines the best characteristics of active investing and index fund investing: the potential for substantially market-beating returns with portfolio simplicity and low fees and expenses. Timed index investing, despite the use of index funds, is not passive investing. Timed Index Investing uses active investing, namely market timing. Market timing means being long in uptrends and bull markets and short or in cash during downtrends and bear markets.

Simplicity: Timed index investing can be done very profitably with as little as one ETF or mutual fund. With dozens or even of hundreds of stocks in a single index fund tracking the broad market (such as the S&P 500 or NASDAQ), you have more than sufficient diversity. Allocation into additional fund asset classes is superfluous and absolutely not necessary with a timing system that works.

There's a multiplicity of ways to time the markets and thus timed index investing comes in a variety of flavors, depending on the individual practitioner. Below are some timing systems applicable to timed index investing, with track records that deserve consideration.

Although there are timing systems that have been fully explained in the investment literature and can be followed by do-it-yourselfers (DIY investors), timing services that charge fees or subscriptions use proprietary systems.

Timing services come in two forms: those provide subscription-based timing signals for DIY investors and those that manage funds for a fee employing their timing system within the account management.

Trend timing is both a reactive and predictive trading system. When a trend reversal has been identified, the new trend has already begun. The trend trader then enters the market with the trend (long or short), with a high degree of predictive accuracy in correctly identifying the trend.

Technical indicators are by nature reactive, or lagging, rather than predictive, and for that reason the trend trader entry misses the absolute bottom of the trend. It is predictive in the sense that once momentum has started, it will continue for an extended period of time. The trend trader jumps on board only when the wave has started, not before. For that reason, the trend trader misses some of the upward gains of the market.

Buy-and-holders and market timer debunkers extol the virtues of being in the market at all times and reaping the entire gains of the market. As proof, they may show a market timer's yearly underperformance of markets when they are up. It is true that trend traders, because of their delayed entry into an uptrend, will underperform the buy-and-holders. But the skeptics and debunkers seem to have a blind spot. The buy-and-holders usually neglect to mention the other side of the coin of a buy-and-hold strategy, the egregiously negative side of the double-edged sword, that of sustaining huge losses when the market trends down.

The good trend traders will either be out of the market during downturns, or be short, thus avoiding large losses or gaining profits, while the buy-and-holders get slaughtered, effectively wiping out much, most or all of their upside gains. This dynamic of positive underperformance in up markets and outperformance in down markets is typical of good market timers: their cumulative yearly performances through up and down years shines, beating the market over the long term. This is clearly illustrated by looking at Sy Harding's system yearly performance records, where in up years his positive returns are substantially less than the market, but after a number of bull and bear markets his overall return is double or triple the market indices.