The Challenges of Market Cycle Timing

Everyone wants to follow the investing advice of market legends. After all, that level of success is typically not achieved by accident. Investors want to learn from their wisdom. They want to do what they do.

In some cases that can be a slippery slope, though, and it is important to consider the advice of market legends in the context of your own personal situation.

Howard Marks’ new Book, Mastering the Market Cycle: Getting the Odds on Your Side, has prompted many investors to take a fresh look at where we currently are in the market cycle, and what changes, if any, that might warrant within their portfolios. In the book, Marks argues that the market has repeated similar cycles throughout history, and by knowing where we currently are in that pattern and adjusting accordingly, investors can improve their long-term returns.

The description of the book puts it this way:

We all know markets rise and fall, but when should you pull out, and when should you stay in? The answer is never black or white, but is best reached through a keen understanding of the reasons behind the rhythm of cycles. Confidence about where we are in a cycle comes when you learn the patterns of ups and downs that influence not just economics, markets and companies, but also human psychology and the investing behaviors that result.

There is no arguing with the first part of what Marks is saying. Markets clearly have followed similarly patterns historically. And some skilled investors can determine where we currently are in that process and alter their portfolios to take advantage of that. But for most investors, implementation of the type of advice presents a host of problems. The reason is that it doesn’t consider the factors unique to every investor that are essential to building a successful investment strategy, and sticking with it.

A good way to look at the challenge of following any particular piece of advice like this is to look at the steps that would be required to do it. Looking at things that way can often unearth the likely implementation issues that come with any change to an investment strategy. In this case, for an investor to adjust their portfolio to capitalize on where we are in the market cycle, they would need to answer the following questions.

1 – Where are we in the market cycle?

Marks thinks we are in the 8th inning. That sounds about right. We have had a long run here. If you are someone who believes a bull market starts at the bottom, we are in one of longest ever. If you believe a bull market starts when new highs are reached (I fall into this camp), then the bull market has been much shorter, but we still have had a big run.