This Is How to TIME the Market

Dear Reader,

Pretty much anyone with even a passing interest in financial matters will have heard the way to wealth creation is…

‘It’s TIME in the markets, not timing the markets’.

Investment industry marketing perpetuates this belief…time and time again.

And to validate this belief, the industry’s marketing material usually has a chart like this one…the All Ords rising almost 14-fold over a 40-year period.

Money Morning

Source: Trading View

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Case closed. It’s ‘time in the market’ NOT ‘timing the market’ that’s the clear winner.

Not so fast.

The past 40 years is also the period when the world went NUTS over debt.

Not a good time to spend time in the market

In 1980, according to the IMF, global debt was estimated to be 120% of GDP.

Global GDP at that time was US$11.5 trillion…which means in USD terms, global debt was $14 trillion.

According to Reuters on 15 November 2019 (emphasis added):

‘‘With few signs of slowdown in the pace of debt accumulation, we estimate that global debt will surpass $255 trillion this year [2019],”the IIF [Institute of International Finance] said in a report.

Do you think it’s possible the additional US$241 trillion of debt had a positive influence on share markets?

If, like me, you see there’s a connection between the two, then you have to ask, what happens to markets if the debt bubble bursts and/or does not keep inflating at the same rate?

Greg Canavan recently caught up with US gold expert Jim Rickards to talk about the truth behind the recent rise of the gold price in Australia. Click here to watch.

We saw what happened to markets in 2008/09 when debt levels simply flatlined.

What the investment industry conveniently airbrushes out of existence, is the performance of the All Ords index prior to 1980.

As the next chart shows, the market did nothing for almost 15 years.

That was not a particularly good time to spend time in the market.

Money Morning


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Those who only look to the market’s wealth creating powers over the past four decades but fail to recognise or acknowledge the enormous role the debt played in that result, are certain to be blindsided by an era of debt contraction.

The only answer to whether it is ‘time in the market or timing the market’ is…it depends.

And what it depends upon is whether your life cycle is in sync with the market cycle.

If you retired 20 or 30 years ago, then ‘time in the market’ was a definite winner.

However, if you retired in the mid-1960s, then — as you will see shortly — ‘timing the market’ would have been the preferred strategy.

If we’re on the cusp of a major change in trend — we enter a prolonged period of debt stagnation or contraction — then ‘time in the market’ will likely leave you much, much poorer.

How can you time the market?

But how can you time the market?

You’ll never ever, ever pick the top or bottom.

However, there are times in the market cycle when shares are a low risk/high reward OR high risk/low reward proposition.

It’s the old ‘buy low, sell high’ strategy.

Unfortunately, most people get their timing back to front…buy high and sell low.

The following is an extract from the updated version of The End of Australia.

It outlines a simple ‘timing’ methodology that I’ll be employing to navigate The Gowdie Letter portfolio through the stormy waters ahead…

The investment industry tells you to ‘diversify’, ‘don’t have all your eggs in one basket’, and ‘you can’t time the market’.

But there are times when you should be in and times when you should be out of markets.

Determining when to increase or decrease weightings in a particular asset class has mostly been done by guesswork and gut feel.

Which is why most people don’t do it well or are in when they should be out or vice versa.

Let me share with you a mathematical methodology that assists in putting your capital in the best position to minimise downside and maximise upside.

In my experience, people tend to ‘smell the sizzle and ignore the heat’.

By this I mean, they’re seduced by the upside and largely ignore the downside.

Assets have an embedded downside risk.

Yet, few people really factor this into their calculations…until it’s too late. That gaining of wisdom comes at a very high price…financially and emotionally.

John Hussman, of Hussman Strategic Advisors, recently published a Strategic Allocation White Paper.

If you’re into well-researched technical analysis, then reading this paper in its entirety is definitely worth your time.

Hussman takes aim at the traditional investment industry’s asset allocation approach — the one my friend is being confronted with.

This is from the white paper introduction…

Two popular approaches for long-term investment planning are “target date” strategies that set allocations to equities and fixed income based on the number of years until retirement, and “fixed allocation” approaches that invest a constant percentage of assets in stocks, bonds, and money-market securities, with little or no variation.

The striking feature shared by these approaches is that the amount invested in stocks, bonds, and other securities has absolutely nothing to do with investment valuations or prevailing market conditions; even if the securities being held are profoundly overvalued or undervalued relative to historical norms. Indeed, the assumptions made by investors and pension funds about likely future investment returns are often set based on average historical returns, even when prevailing market valuations are nowhere near the valuations that produced those historical returns.

The industry tells you there’s no bad time for a good investment. Really?

What about if you are seeking advice in (say) September 1929 or September 1987 or January 2000 or December 2007? These are the periods just prior to the market’s most epic crashes.

Anyone who invested at any of those times would probably not agree with the industry’s propaganda.

It’s an insult to a person’s intelligence to suggest there’s never a bad time to invest. The premise doesn’t stand up to even the most basic of scrutiny.

This is why John Hussman’s white paper is such a refreshing change to the nonsense peddled by the industry’s marketing machinery.

For those who don’t have the time or inclination to read his work, here’s my abridged version.

John Hussman has developed a model that assesses the risk versus reward tradeoff between three asset classes…

Stocks (S&P 500 index)

Bonds (government bonds)

Treasury bills (cash)

Here’s a couple of examples from the white paper.

The charts are US date stamped. 5 January 1973 is written as 1/5/1973.

The BLUE line in the following chart is the risk-adjusted return of US shares…the range is from MINUS 2% to POSITIVE 6%.

The YELLOW line is the risk-adjusted return of government bonds…the range is from POSITIVE 2% to POSITIVE 6%.

The RED line is the risk-adjusted return of Treasury bills…the range is from POSITIVE 5% to POSITIVE 4%.

Money Morning

Source: Hussman Strategic Advisors

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The preferred asset allocation is determined by which risk-adjusted asset class offers the best potential return on the matrix. This is shown by the dashed line.

The horizontal index shows it’s BILLS, followed by BONDS.

The ratio of bills to bonds is then used to create the asset allocation pie chart in the bottom right-hand corner.

According to the risk-adjusted asset allocation model, an investor in January 1973 would have been better off being out of the US share market.

Here’s what happened to the Dow Jones index during that period. Over the next two years, the Dow plunged 40% in value.

Money Morning

Source: Macro Trends

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After a substantial correction, the dynamics of the risk-adjusted model change.

Here’s the asset allocation model, date stamped 4 October 1974. Shares offered far more reward than risk. The model recommended a 100% exposure to shares.

Money Morning

Source: Hussman Strategic Advisors

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This is what happened to the Dow Jones after October 1974.

Money Morning

Source: Hussman Strategic Advisors

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There was an initial drop — which just goes to show you can never pick the bottom. But anyone who adopted the recommended asset allocation was rewarded with a 50% return over the next two years.

This is what I mean about timing being crucial to your long-term financial wellbeing.

Those who adopted a ‘time in the market’ approach had to hold on tight during the plunge and then have the nerve not to sell. Which, believe me, is far easier said than done.

And if in the unlikely event they managed to do that, their reward was a zero return over a four-year period.

Whereas those who opted out of the market in early 1973 sidestepped the plunge. Their portfolio of bills and bonds earned around 6% per annum (for two years). Then, when the market was offering far better value, they participated in a 50% recovery. In simple maths, that’s a 62% return over the same four-year period.

That was then. What about now?

As at 30 August 2019, this is the risk-adjusted model’s recommended asset allocation.

Money Morning

Source: Hussman Strategic Advisors

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The portfolio is heavily weighted to Treasury bills…cash. And with good reason.

Based on John Hussman’s comprehensive valuation models, he says: ‘I continue to expect a market loss on the order of 60-65% over the completion of the current cycle.

Should the expectation of a two-third loss be realised, it means the S&P 500 index will fall back to a level it first breached in early 1998.

Money Morning

Source: Hussman Strategic Advisors

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More than 20 years of gains are at risk of being wiped out.

Personally, I think it’ll be worse than this.

If ever there was a time to think about ‘time in or timing’ the market…it’s now.


Vern Gowdie,
Editor, The Rum Rebellion

Revealed: The 2020 ASX Blacklist – Stocks to Sell NOW. Download your free report.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion