Revisiting the Fallacy of Market-Timing in an After-Tax Context

Abstract

In this article, the author also considers market timing, not as a strategy, but as a reaction to an earlier faulty decision. Rather than viewing market timing as the result of investor belief that they can always foresee price movements at the asset level earlier than other participants, Brunel considers market timing as a reaction of panic by investors who have adopted too aggressive an asset allocation strategy or have not taken the time to create such a long-term strategy. He compares the performance of a “panicky” investors portfolio to the result of a normal portfolio mix, naively rebalance on a monthly basis, on both pre- and after-tax bases and concludes that the cost of making a market timing error is substantially higher in the after-tax world. While such a conclusion may no be a surprise, Brunel argues it makes the case for adopting an appropriate and comfortable strategic asset allocation even stronger.