Timing the Financial Markets

Timing the Financial Markets

Timing the Financial Markets

Timing the Financial Markets

There has been some misunderstanding in the financial communityabout the use of the word "time" or "timing" in discussing this subject.Obviously, the fund manager can control shifts between commonstocks and cash or fixed-dollar assets in an effort to judge the timingof general market movements, and any measure of the fund manager'sskill should reflect his skill in making such judgements. The fund manager, however, does not control the time at which funds are receivedor at which they must be disbursed, and the measure should not reflectthis timing.

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There is an easy way to make the measurement of the rate of returninsensitive to the timing of receipts and disbursals. In the BAI report,this measure has the possibly confusing name, "time-weighted rateof return." Although the name may be confusing, the principle isnot. The time-weighted rate of return is logically equivalent to therate of return on mutual fund shares which are bought and redeemedat net asset value per share. The investor who purchases shares ina mutual fund can measure the rate of return on his investment byknowing the price he paid, the value of payments received, and the price of the shares at the end of the period in question. He does notneed to know the time or amount of new investments in the fundby other investors who bought shares or the time or amount of disbursals from the fund to shareowners who redeemed their shares. The individual investor's rate of return is totally insensitive to those injections of capital into or withdrawals of capital from the fund.

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It will not be surprising to any reader who has persisted to thispoint that the BAI report recommends that performance must takeaccount not only of the rate of return on assets but also of the riskto which the investor has been subject. It is undesirable or unwisefor all investors to subject themselves to the same degree of risk, andtherefore not all investors should expect the same rate of return. The elderly widow whose primary objective is the protection of her assetsfrom loss cannot expect as high a return as the more venturesomeyoung physician whose primary objective is to maximize the value ofhis holdings 25 years in the future. If one knew only the rates ofreturn on the widow's and the physician's respective portfolios, one would not be in a position to judge the skill with which their investment advisers had done their work.

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