Gravity believes that market timing has a place in the portfolio construction process and that market timing is often misunderstood and misused. Attempting to apply timing to the overall portfolio on an all-in basis is quite dangerous and largely unproven as a successful strategy over longer periods of time. This is the typical approach demonized by the likes of index investing proponents. From a diversification perspective, this type of market timing acts as a common denominating factor that effectively decreases the portfolio diversification, and consequently increases the risk. Although in most strategies the manager reserves the right to make such a dramatic shift, in light of extraordinary conditions, typically such actions are not taken within the course of a given year. If a train is coming down the track, and we see it, we can get off the track. We are bound by no dogma, except the performance demands of our trusted investors.
However, we apply market timing in other ways that are less consequential to the portfolio. At the margin, we use timing to shift our entry and exit points from investments we will already be trading. At the managers discretion within a few weeks we seek to buy on down days and sell on up days. Additionally, and again at the margin we may advise on account funding or liquidation to take advantage of the regular ups and downs of the market. Last we take advantage of timing in another sense, via momentum, when it comes to creating our forecasts for security prices. Though rigorous, proprietary research we have discovered historical periods that, on average, do a little bit better job of predicting the future. We maximize the usefulness of historical data by selecting and weighing these look-back periods to help forecast better. This also helps to prevent making investments too early, a concept Wall Streeters call, “dead money.”
A well-diversified portfolio is diversified in both the investments that it makes but also in the investment process itself. Market timing and momentum can has a place in a sound, fiduciary investment-process, but not if they play such a prominent role as to decrease the portfolio diversification.