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Responding to an earlier post, a commenter asked why a momentum strategy should be called market timing and asked for a definition. In Unconventional Success (read review), David Swensen has the following definition for market timing:
Market timing represents a short-term bet against well-articulated long-term asset-allocation targets. Market timers hope to underweight prospectively poorly performing asset classes and overweight prospectively strongly performing asset classes, employing tactical moves to enhance portfolio returns.
Most individual investors would fall under two types of market timing: (1) Chasing recent performance by buying recently “hot” asset classes or (2) Letting their portfolio drift from target allocation by not rebalancing. A momentum strategy that bets on recent strong performance continuing is, by definition, a market timing strategy.
I have to confess to practicing a mild form of market timing because when I think an asset class is overvalued, I don’t hesitate to keep any new money intended for that asset class in cash waiting for a suitable buying opportunity. But once I’m invested, I’m in for the long haul, except for occasional rebalancing.
