Best Wealth Management Strategies: 20 Questions About Market Timing

By : Teresa Conley | May 18, 2019

Often, we’re asked why our wealth management advisors don’t advocate financial strategies that involve attempts to beat the market. We don’t mind answering this question; in fact, we like to talk about this issue. Why?

Teresa Conley is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt County

Because it gives us the chance to explain why the best wealth management strategies don’t employ the techniques that some financial advisors and fund managers use to grab extra returns.  We feel that, for most investors, simply capturing market return through proper market timing is all you need to have a good investment experience.  We want to provide you with 20 handy questions you should ask anyone who thinks beating the market is a sound idea.

Why Your Financial Planning Shouldn’t Include Beating the Market

One reason: Trying to beat the market doesn’t work. Market timing is simply not consistent enough to be properly predicted. Both historical financial data and empirical research (along with 2013-Nobel-winning economist Eugene Fama) support this simple fact. Though the financial media and Wall Street love to champion the myth of the skilled stock picker who consistently and repeatedly picks winner after winner is really just a fairy tale. We’ve written about this issue extensively, and you can find a more comprehensive discussion of why market timing and stock picking are ineffective herehere, and here

20 Questions for Investment Professionals Who Advocate Beating the Market

The next time an investment professional — or, for that matter, anyone — suggests that you attempt to beat the market, it’s time to play 20 questions.

(We suggest printing this list out in a tiny font and laminating it for portability.)

  1. How, exactly, do you define “beating the market?”
  2. Does your strategy involve taking on additional risk? If yes, what is it?
  3. Is beating the market a financial strategy that works in general, for any investor?
  4. Most investors try to beat the market. What’s the overall success rate?
  5. Why do most investors who attempt to beat the market fail?
  6. Given the fact that most investors fail to beat the market, how are you, specifically, different?  Do you actually know someone who consistently and repeatedly (year after year) has been able to beat the market?  Can they deliver evidence to support this?  
  7. Does beating the market depends solely on identifying the most promising companies?
  8. Does the right company equal the right investment, regardless of its stock price?
  9. Can a promising company be overpriced? If it’s possible, how can you tell when this is the case?
  10. Beating the market based on making superior predictions. What predictive model do you use?
  11. What determines relative stock prices, a.k.a. each stock’s price relative to other stock prices?
  12. How do you know that the stock you’re recommending is mispriced?
  13. If lots of other investors employed this strategy, would it still work?
  14. What’s the probability of your strategy succeeding?
  15. Your strategy sounds good; what evidence do you have that it actually works?
  16. If you’re winning, who is losing? If you’re above average, who is below average?
  17. Do you believe that diversification is important? If so, how do you plan to achieve it?
  18. When someone makes excess returns, was it because of skill or luck? How can you tell the difference? Does it matter?
  19. Is return more or less important than risk? Why or why not?
  20. Why are you sharing this advice? Why aren’t you keeping it for yourself and exploiting it for your own benefit? Doesn’t sharing this advice actually dilute its potential benefit for you — and for everyone else who may try it?
Market timing

While we’re not ones to speculate, our educated guess is that the answers you receive to these 20 questions won’t do much to convince you to add beating the market to your comprehensive financial plan.

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