Asset Allocation

Back in the Hunt

Topics - Asset Allocation Tactical Asset Allocation

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Back in the Hunt

Institutional Investor

The article explores the feasibility of market timing, often considered an investing sin, using a combination of contrarian and trend-following strategies. Authors apply these ideas to stocks and bonds and their combination; arguing that if employed in moderation, market timing can be a virtue.

To be sure, market timing is very hard. For those who think market timing a two-asset mix of stocks and bonds is impossible, authors give some measured hope, while for those who think it's easy, authors show that it isn't. The authors’ advice is therefore to "sin a little."

The authors suggest the following practical recommendations for market timing:

  • Combine signals: Contrarian and trend following signals tend to diversify one another and seem to work best as equal partners.
  • Breadth is important: Timing across asset classes (more than one) is important, as is using multiple signals; contrarian and trend following (among other styles like carry, low risk, and high quality) are shown to be useful. So use timing in as many places as possible.
  • Timing is a modest reward-for-risk strategy: Timing has the potential for rewards, but it is not a high-return-for-risk strategy. As such, investors should employ timing, but only in very moderate amounts.
  • Act in moderation, not binary: Don’t employ market timing by getting in or out of an asset class entirely. It makes much more sense (and more likely to succeed over the long haul) to own less of an asset class when you are less positive on it, and vice-versa.

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. Hypothetical performance results are presented for illustrative purposes only.

 

Diversification does not eliminate the risk of experiencing investment loss.

 

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