After discussing the evaluation of market timing analysts, I thought I would add you a little demonstration to represent the importance of good market timing.
First, remember that many love to say "I expected" or "I told you so" (and I myself am guilty of doing so ... go back to my assessment of the banking system U.S. in early 2009). Is to see who can actually boast that this way of evaluating the predictive ability of analysts is important. Whoever is right most of the time well we can make small "crises of bragging), but when it's been years and you say" you'll see "bad" it's coming "... your ability to market timing is a bit .. . probation. If someone says since 2003 "you'll see, the markets will crash!" it is certain that he will eventually be right. But he has been wrong for several years. The timing is therefore an important concept in preparation for movement. Besides, it's one thing repeated by the CFA ... a prediction time frame without is worth NOTHING! View Dow at 12 000 points says absolutely nothing. When does it reach 12 000? In a month? a year? 25?
The time factor is critical to good recommendations and forecasts. And then I'm not talking about short term market timing . I do not speak to predict whether tomorrow the market will be bullish or bearish. I talk to have good timing in the month, quarter or year. To demonstrate the importance of market timing, I'll redo this a little simple exercise is done in some of my current portfolio management at work to see the interest compounds and better grasp the basic concepts of risk. Take six investors (managers or analysts whatever):
- A: Do not believe in any way the stock markets. They are too expensive and too risky. He therefore prefers to invest only in Treasury bills.
- B: Do not swear by the stock market. Is fully invested at all times.
- C: He has the gift of seeing into the future and knows at the beginning of each month if the market will yield a positive or negative. He buys when the market will be positive and less Treasury bill when it is more profitable investing in the market. We say that C has a perfect market timing.
- D: A good friend C. It follows the same direction as C, but the opportunity to sell short the market when it is negative.
- E: Did not the gift of C. So he decided to chance it invested in the market or Treasury bills. Chance makes it right about 1 to 2 times as much to market. bull and bear. His score in my last post would be 0.
- F: Does as E except that it leaves nothing to chance. His ability to understand markets allows it to make a good prediction 6 times out of 10. His score in my last post would therefore be 0.20.
The time period is that I have available. During my data stopped in 2003. You can continue to 2004-2010, but we should see the same thing. I checked and the difference between each portfolio is very stable over time. I'm not talking about the concept of risk here because it is a little catch with the calculation of risk for investors, C and D. But otherwise, E and F is a standard deviation less than B. For fans of methodology, projections of E and F were produced in a Monte Carlo simulation. Well here are the results:
... even lower ...
- $ 1 for Investor A is $ 17.56: annual yield of 3.7%
- $ 1 for Investor B is 2 $ 114.95: annual yield of 9.9%
- $ 1 for Investor C is 21,792,606 728.67 $: annual return of 30.9%
- $ 1 for Investor D is 61 950 641 518 119 $ 856.00: annual return of 50.6%
- Investor E $ 1 worth $ 277.17: annual yield of 7.2%
- $ 1 for Investor $ 654.03 worth 11 F: annual return of 12.1%
I think I can let you draw your own conclusions the usefulness of market timing in our forecasts. Note that for F, it is right 6 times out of 10 is a performance comparable to a normal financial analyst. A very good analyst could achieve a score between 0.4 and 0.6 according to the formula of previous post.
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