The New Market Timing

I am really disappointed in the product description outlined in an article in Investment News.  It advocates an investment process focused on evaluating asset classes and sectors for valuation, allocating capital when the valuations are attractive.  When valuations get "extended," capital is to be allocated to alpha-generating strategies.

This is just a market timing scheme dressed up with some new nomenclature.  The object is to be in a "risky" asset (e.g. stocks) when they are going up, and a risk-free asset (e.g T-Bills) at all other times.  Substitute some equity sector options and maybe some commodity exposure for a stock fund, and an absolute return fund for the T-Bills, and you have engineered the suggested strategy.  Unfortunately, the empirical evidence is that the strategies do not add value, either underperforming or taking excessive risk, or both.

The use of the alpha-generating strategies introduces an element of risk that few are willing to acknowledge.  These absolute return strategies are highly susceptible to fat tails.  And the leverage used on the strategies makes encountering the fat tail extremely dangerous.,  Just ask Long Term Capital Management.

I will continue to advocate a strategic asset allocation approach for individual investors.  Creating the lowest risk portfolio that will achieve the goals and educating the client on the relationship between risk and return ultimately will provide the most successful relationship.