Market Timing: Sin a Little Resolving the Valuation Timing Puzzle

Volume 15, Number 3, 2017
Cliff Asness, Antti Ilmanen and Thomas Maloney

Successful market timing is a tantalizing holy grail for investors, especially when there seems to be persuasive evidence that simple valuation measures can predict subsequent market performance. But, as both researchers and investors have discovered, outperforming a passive buy-and-hold approach is harder than it might seem. Is market timing a useful source of added value or a sin to be avoided? In this paper we explore the difference between the encouraging in-sample long-horizon evidence and directionally right but weak and disappointing out-of-sample performance.We propose an interpretation that offers a practical enhancement to value timing strategies: adding a dose of momentum.