The myth of market timing debunked again

By Kevin Startt

Startt Planning!


Advisors who rely entirely on asset allocation models and forced allocations, and not on subjective judgment and conviction, may be setting their clients up for the same disappointments that occurred in 1988.

As the market roars ahead 6 percent for the year and much of the country shivers under an Arctic Blast in the middle of winter, I am reminded of why God created stock analysts: to make the weather forecasters look good. The idea of tactical asset allocation and market timing in both index annuities and variable annuities is provocative and interesting.

Jackson National recently launched its elite access variable annuity product, and Franklin Templeton mutual funds has been pushing the envelope with its emphasis on investing globally in frontier markets. Commander Kirk of the Starship Enterprise would be blushing by now in conveying to Scotty that we have been here before. These products certainly fill a void but typically hit the street about five years too late as product wonks conjure up ideas with a rear view mirror.

The Jackson product features a broad investment lineup moniker, including access to alternative investments like managed futures and covered calls. “The product claims to take advantage of incredible growth and unthinkable volatility,” much like the triple levered ETFs that were launched just prior to the tech wreck of 2000-2003. Meanwhile, the traditional 60-40 stock bond allocators laugh all the way to the bank as a measurement of the market’s volatility, the VIX, remains tranquil and stays below 20 consistently as the stock market climbs a wall of worries. The wonks at Jackson and Security Benefit may be right in the long haul, but after successful policy launches, one wonders if the policyholders will benefit from another tactical asset allocation stumble.
Reincarnations of market timing are often given new names. In 1988, after an October crash, tactical asset allocation was all the rage as proponents argued that computers would minimize the risk of human judgments. Today, variable annuity companies justify forced allocations into bonds at the end of a 30-year bull market and with record low yields, to explain providing guaranteed minimum withdrawal benefits.

Advisors who rely entirely on asset allocation models and forced allocations, and not on subjective judgment and conviction, may be setting their clients up for the same disappointments that occurred in 1988. A 1974 study by award-winning professor William Sharpe showed clearly that being invested in bull markets is much more important than being out of stocks in a bear market, even after periods like the last 12 years.

The study showed that, despite what life insurers do to provide pricing for an income rider, switching money in and out of the market requires a forecasting success that is impossible because major turning points in the stock market are almost always triggered by random events that are completely unpredictable. The surprise that burst through the 1500 level for the S&P 500 has been missed by many variable annuity allocations that provide living benefit riders and missed the 2012-13 move of nearly 20 percent in the markets.

This is one reason why most VA subaccount lineups underperform benchmarks along with high fee levels. One advantage of Jackson’s new product, like its predecessor products as well, is that it does not force investors and advisors into the model. Maybe this is why Jackson is consistently a top-give VA vendor and has a majority of its subaccounts outperforming benchmark indices most of the time.