Tactical Investing’s Failure in 2012 (and why we still can’t predict the future)

(This post is in response to Josh Brown, aka The Reformed Broker’s post today titled A Graveyard for Tacticians.  You can read the original post in its entirety here: http://www.thereformedbroker.com/2012/11/30/a-graveyard-for-tacticians/)

Josh has a great piece up today demonstrating how absolutely fruitless tactical investing (let’s just call it market timing, ok?) can be in practice.  Most of these firms have reams of paper showing back-tested historical results, but if I have all of the data on how the market is going to behave, I can deliver some pretty impressive numbers too.  The rub is that predicting the future is still REALLY REALLY HARD and in general we are pretty bad at it.

Josh picks on a favorite metric of technical-based market timers, the 200 day moving average.  The “rule” is that if the market (let’s say S&P 500) drops below it’s 200-day moving average, get out!  Twice this year the market broke that line and subsequently shot back up.  So those who got out did so at the bottom.

Tactical investing Market timing has boomed in popularity in the past few years as many investors felt “burned” by the bear market of 2008-2009.  Market timers promised that they could deliver results with less risk. Investors (and probably their advisors) piled into tactical allocation market timing funds, exhausted by the volatility the markets gave them for these five long years. It only took a few years to prove that these investors had repeated a pattern of jumping on the investment bandwagon at exactly the wrong time.

Where Josh takes a break, I’ll pick it up.  He stops short of admitting that 2012 (like every year) was a tough year for active investors of any stripe to beat the market.  Who predicted the big run up after a spring sell off?  Who predicted Apple’s total dominance early in the year, and then weakening later in the year? The fact is that you would have had to predict all of these things and more to consistently beat the market. Josh claims that buy-and-hold is dead, and I’ll politely disagree.  Well diversified investors who were aware that investing involves risk and did not panic at the bottom have likely seen portfolios recover to their 2007 highs.

Crying that “it’s different this time” and jumping from one investment philosophy that “isn’t working” to something new and promising is the investor’s oldest and favorite mistake. Promising hot new investment strategies to greedy/scared/weary/anxious investors is the Street’s best game.

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