WALL STREET Market timing, though legal, attracts scrutiny

Some experts say timing stocks is not a wise investment strategy.
KNIGHT RIDDER NEWSPAPERS
William E. Donoghue is spoiling for a debate on the merits of market timing.
To ignore timing means "growth funds that don't grow, value funds that don't add value, and managers who don't manage," said Donoghue, an investment newsletter writer and money manager in Natick, Mass.
What he got instead is tough talk from New York Attorney General Eliot Spitzer.
Timing involves placing short-term bets on the direction of the stock market, or parts of it. It represents the opposite of a long-term strategy of picking an investment and sticking with it.
Spitzer likened timing to a casino that says it prohibits loaded dice, and then passes them out to favored gamblers.
Citing examples of alleged improprieties at four mutual funds, a complaint he filed recently rocked an industry built on leveling the playing field for ordinary investors.
Broad accusations aside, market timing isn't unethical or illegal if fund companies publicly embrace the practice, and many do.
A new look
Timing is getting a new look from investors after three years of stock-market losses. For example, assets grew 50 percent to $9 billion so far this year at Rydex Funds, a Rockville, Md., fund company catering to timers.
Noted economist and author Peter Bernstein chided institutional money managers earlier this year for not being more opportunistic (read: timing) in an era of stingy investment returns.
But if timing is more acceptable, is it wise? Experts say "no."
"The fly in the ointment is execution," said Jeffrey Ptak, a Morningstar mutual fund analyst. "It requires an enormous amount of skill that the vast majority of investors don't have."
Even the pros lack the smarts and the temperament to beat the market long-term, said Mark Hulbert, who rates the performance of market strategists who write investment newsletters.
"Over long, long periods of time, 10 years or more, you're going to find that 80 percent fail and 20 percent succeed," said Hulbert, editor of the Hulbert Financial Digest, in Annandale, Va.
Winning strategy
Discipline distinguishes winners from losers, he said. Winning newsletter writers stick to their guns even in ugly markets that cut deeply into investment returns -- and subscription lists.
Market timers move in and out of the market frequently, betting that they can make money on the market's zigs and zags. These bets stay in place for just days, weeks or even months.
By contrast, buy-and-hold investors, measuring progress in decades, are content to reap the overall gain in the market generated by a growing economy, and increases in corporate earnings and dividends.
Fund companies serving buy-and-hold investors often ban market timers because frequent trading translates into higher expenses and taxes.
Buy-and-hold investors should seek out mutual funds with a low turnover rate, or percentage of its assets bought or sold in a given year. A turnover rate of 30 percent or less indicates a buy-and-hold strategy.
Fickle investors
To be sure, individual investors can be fickle as well. According to an annual survey by Dalbar Inc., a Boston financial services consultancy, the average investor holds a mutual fund for 2.5 years.
"They buy a couple of weeks after the market spikes up and they sell a couple weeks after the market spikes down," said Heather Hopkins, a Dalbar vice president. "They make very poor decisions in timing the market."
There is an appalling level of self-inflicted damage among investors in Dalbar's estimates of individual investment returns. The study calculates holding periods by extrapolating them from flows of money into and out of mutual funds, and applies them to historic returns.
Dalbar estimates that the average investor earned 2.57 percent a year between 1984 and 2002, or roughly a fifth of the 12.22 percent annual gain of the Standard & amp; Poor's 500 index.
Long-term approach
Some timers also have trouble breaking away from the crowd, said Chuck Tennes, portfolio director at Rydex, although timers do better when they focus on trends taking place over months rather than days.
"I don't often see people making money trading rapidly," he said. "Where do you draw the line on timing that's foolish and damaging?"
Donoghue's strategy is to rotate among various industry groups, or market sectors, using mutual funds or exchange-traded funds, which are effectively index funds that can be bought and sold like stocks.
Donoghue, who earned a graduate business degree from Temple University in 1975, built a money-fund publishing business in the 1980s and sold it to imoneyNet.
Bullish lately, Donoghue recommends buying index stakes in semiconductors and Japanese stocks, and selling shares in Rydex Ursa, a mutual fund representing a bet that the market will fall.
Hulbert, the newsletter analyst, estimates that Donoghue's subscribers would have earned 1.8 percent a year since Jan. 1, 2000, by following the three strategies in the DonoghuePlan ActionGram. In the same years, the Wilshire 5000, a broad measure of the stock market, lost 7.8 percent a year.