Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

by David F. Swensen

Market timing, according to Charles Ellis, represents a losing strategy. “There is no evidence of any large institutions having anything like consistent ability to get in when the market is low and get out when the market is high. Attempts to switch between stocks and bonds, or between stocks and cash, in anticipation of market moves have been unsuccessful much more often than they have been successful.”3 Market timing causes portfolio characteristics to deviate from those embodied in the policy portfolio, producing inevitable differences in risk and return attributes. If market timers bet against the stock market by reducing equity holdings and increasing cash positions, long-run expected portfolio returns decline as the market timer’s position decreases risk levels. Because such activity lowers anticipated returns, market timers must succeed substantially more than 50 percent of the time to post a winning record. The wind in the speculator’s face, combined with transactions costs and market impact, provide a high hurdle for those who would beat the market by holding abnormally high cash positions. If market timers increase the risk profile of a portfolio by overweighting a risky asset at the expense of lower-risk positions, fiduciaries must consider the advisability of moving risk beyond policy portfolio levels. If riskier portfolios produce characteristics consistent with institutional goals, portfolio managers ought to consider adopting a higher risk policy portfolio. ...