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Why a Market Timing Strategy leads to poor investment Returns

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Forget relying on a market timing strategy to boost returns. Focus instead on these proven tips for successful investing.

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Market timing is the practice of trying to predict future trends and turning points in stock prices. For most people, this is a wasted, if not harmful, effort.

Random events tend to occur in bunches. A market timing strategy generates a lot of random buy and sell signals. Some are bound to work out well. But few work out well enough to offset losses on the inevitable erroneous signals, and leave a decent profit leftover.

Why successful investors stay away from a market timing strategy

The practice of market timing consists of coming up with and acting on a series of guesses (or estimates, or probability assessments) to use in your buying and selling decisions. Market timing theory attempts to interpret and detect buy and sell signals in trading patterns and history. Some of the decisions you make with the help of market timing will bring you profits, and others will cost you money.

Market timing can pay off sporadically, of course. Although the results are largely random, successes and failures are apt to come in spurts. The worst thing that can happen to you near the start of an investing career is that you make a series of successful timing decisions. This may lead you to believe that you have a natural talent for market timing, or that you’ve stumbled on a timing process that’s a guaranteed money-maker. Either of these conclusions can spur you to back your future timing decisions with growing amounts of money.

A significant market setback of, say, 10% or more will come along eventually. Unfortunately, no one can consistently say when that will be. Trying to foresee setbacks is sure to cost you money, however. That’s because many of the setbacks you foresee won’t occur. If you act on your prediction and sell, you’ll miss out on profits. You may buy back in at higher prices, just in time to be in the market when the next setback does occur. That’s known as a “double whipsaw.”

Eventually it happens to a lot of market timers. Some react by giving up on market timing. Others just give up on investing.

The best market timing strategy I can offer is to buy steadily and carefully throughout your working years, and sell gradually in retirement. That approach is virtually certain to enhance your investing profits. For one thing, it stops you from selling all your stocks near a market bottom, which market timers do from time to time.

How to be a successful investor without using a market timing strategy

Instead of trying to master market timing, you are far better off to study the earmarks of successful investments. Your long-term investment results will improve a great deal if you simply learn to spot and recognize these earmarks, and understand how they differ from the common risk factors in unsuccessful investments.

Here’s a look at some ways to make better investments: Continue Reading…

Playing Defense with Sector ETFs

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Here’s how an equally weighted portfolio of healthcare, utility, and consumer staples ETFs could provide better downside protection and reduce volatility.

Image courtesy BMO ETFs/Getty Images

By Erin Allen, Director, Online Distribution, BMO ETFs

(Sponsor Blog)

The U.S. stock market, particularly the S&P 500 index, isn’t as uniform as it might seem. While you may think of it as a homogenous entity, it’s far from reality.

The S&P 500 can be broken down into 11 Global Industry Classification System (GICS) sectors: information technology, health care, financials, consumer discretionary, communication services, industrials, consumer staples, energy, utilities, real estate, and materials.

Each sector groups together companies that operate in the same industry and offer similar products and services. Historically, different sectors have also shown varying levels of sensitivity to market and economic conditions.

Some are cyclical, meaning they typically do well during economic expansions but struggle in downturns. On the other hand, some sectors are considered defensive, as their revenues and earnings remain stable regardless of economic cycles.

One well-known investment strategy that takes advantage of these differences is sector rotation, where investors shift their money between sectors based on macroeconomic indicators like GDP growth, interest rates, and inflation.

Source: SPDR Americas Research. ++/– indicates the best/worst two performing sectors. +/- indicates the third best/worst performing sectors. The Energy sector did not make the top/bottom three sectors during any cycles, as it is less sensitive to U.S. economic cycles but more driven by global supply and demand of crude oil. For illustrative purposes only. 1

However, for risk-conscious investors, another approach involves overweighting defensive sectors — particularly health care, utilities, and consumer staples — to provide better downside protection and reduce portfolio volatility.

What makes a sector defensive?

A sector is considered defensive when its companies provide goods or services that consumers continue to purchase regardless of economic conditions.2

For example, when the economy weakens, a consumer might delay buying a new car or upgrading their phone. These are discretionary purchases: non-essential items that can be postponed until financial conditions improve.

In contrast, even during a recession, people still pay their water and gas bills and continue buying household essentials like groceries and personal care products.

The underlying economic principle at play here is elasticity. In economics, elasticity measures how much the quantity demanded of a product changes in response to price or income changes.

Goods with inelastic demand see little fluctuation in consumption, even when prices rise or consumer income declines. This makes sectors with inelastic demand more stable during market downturns.

  • Utilities: Electricity, water, and gas are necessities that households and businesses must pay for, regardless of economic conditions.
  • Consumer Staples: Essential items like food, personal care products, and household goods remain in demand even when discretionary spending drops.
  • Health Care: Medical services, prescription drugs, and insurance are critical expenses that people prioritize, often regardless of cost.

How defensive are these sectors?

One way to quantify how defensive a sector has historically been is to look at its beta, a measure of volatility relative to the broader market3.

The market itself has a beta of 1.0, meaning any stock or sector with a beta below 1.0 tends to be less volatile and moves less than the overall market during upswings and downturns.

When analyzing long-running sector ETFs, the historical five-year betas confirm that health care, consumer staples, and utilities have lower volatility than the broader market.

The Health Care Select Sector SPDR Fund (XLV) has a beta of 0.644, The Consumer Staples Select Sector SPDR Fund (XLP) comes in even lower at 0.575, and The Utilities Select Sector SPDR Fund (XLU) has a beta of 0.746. This suggests that all three sectors historically experience smaller price swings compared to the S&P 500.

Further supporting this, research from State Street Global Advisors examined periods of steep market drawdowns. Between 1999 and 2022, there were 11 instances where the S&P 500 declined by 10% or more in a single quarter7.

They found that an equally weighted portfolio of health care, consumer staples, and utilities delivered significantly smaller losses than both the S&P 500 and the Russell 1000 Value Index.

 Morningstar direct. Data as of 6/30/227

This demonstrates how overweighting defensive sectors has historically provided better downside protection in times of market stress versus broad market indices.

The ETFs for the job

BMO’s lineup of SPDR Select Sector Index ETFs includes three options that align with the defensive sectors discussed earlier. These ETFs provide targeted exposure to U.S. health care, consumer staples, and utilities, ensuring investors can overweight these segments without exposure to the rest of the S&P 500. Continue Reading…

Navigating Volatility with Asset Allocation ETFs

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Image courtesy Harvest ETFs

By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog)

The S&P 500 was down 3.53% in the year-to-date period as of mid-afternoon trading on Wednesday, March 19, 2025. Markets in the United States and across the globe have been hit with turbulence while the threat of tariffs has ramped up trade policy tensions. Earlier this month, we’d suggested that investors might consider taking it back to the basics.

In this piece, I want to explore why striking a defensive posture and pursuing diversification in your portfolio could provide peace of mind going forward.

The macroeconomic environment today

There are elevated risks that have led to uncertainty in the markets today. We are now two full months into Donald Trump’s second Presidential term. It already feels much longer than that to many Canadians. Investors may want to prepare for elevated volatility in the near to mid-term as there appears to be no immediate relief in sight when it comes to prickly trade tensions between allies and adversaries alike in the geopolitical sphere. Global trade policy uncertainty, a measurable index that quantifies policy risks, is the highest it has been since Trump’s first term.

Valuation concerns have been added to the risks and uncertainty. This is particularly true in the U.S. with regards to big tech. Investors have started to question the pace of earnings growth, as well as the strength and confidence of the consumer. A March report from the University of Michigan Consumer Sentiment Index showed it falling to 57.9. That is the lowest level since November 2022. It also represents a 10.5% drop from the same time in February 2025. Consumer sentiment had declined by 27.1% – or 21.5 points – in the year-over-year period. That is the largest annual decline since May 2022.

Between tariffs, geopolitics, valuations, and the economy, investors are being presented with an increasingly challenging and noisy backdrop.

Advantages of Asset Allocation funds

The biggest advantage that Asset Allocation funds offer investors is diversification. Diversification, it has been said, is the only “free lunch” in investing. Diversification does not eliminate risk, but it does spread out risk broadly. That has the potential to create more robust portfolios.

Asset Allocation exchange-traded funds (ETFs) help investors better diversify their holdings. These ETFs also provide the discipline to stay invested in the market to help manage the market gyrations that all investors inevitability experience. Staying invested in markets, especially in times of heightened volatility, is historically what sets investors up for long-term investing success. Moreover, asset allocation strategies offer investors the benefit of the package. While many investors may tweak exposures through individual ETF holdings, many can benefit from the “one-ticket approach” offered by asset allocation ETFs.

Asset allocation strategies in 2025

The Harvest Diversified Equity Income ETF (HRIF:TSX) allocates to other Harvest Equity Income ETFs – which overlay an active covered call strategy on a portfolio of sector-focused equities – to generate attractive equity income across a well-diversified sector mix.

Meanwhile, the Harvest Diversified Monthly Income ETF (HDIF:TSX) represents the same portfolio of Harvest Equity Income ETFs. However, HDIF employs modest leverage at approximately 25% to amplify returns and income.

Notable sectors in these ETFs include defensives like health care, utilities, real estate investment trusts (REITs), and it is complemented by growth sectors such as technology and industrials. The use of the covered call writing strategy transforms market volatility into higher levels of cashflow. These ETFs are one-ticket globally diversified equity income exposures, offering attractive overall yields.

A traditional balanced asset allocation portfolio

The traditional “balanced” investment portfolio is composed of 60% equities and 40% bonds. In 2024, Harvest launched the Harvest Balanced Income & Growth ETF (HBIG:TSX) and the Harvest Balanced Income & Growth Enhanced ETF (HBIE:TSX). These ETFs incorporate Fixed Income ETFs into the mix, aiming to replicate that 60/40 asset allocation. These Fixed Income ETFs include intermediate and long duration US Treasuries. Continue Reading…

Gangster in the White House: This time it’s different.

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Royalty-free image by Sammy Sander on Pixabay

By John De Goey, CFP, CIM

Special to Financial Independence Hub

The four words ‘this time its different’ were made famous by Sir John Templeton as an admonition against the overzealous embrace of new paradigms.

To him, there is nothing new under the sun regarding the interplay of valuations and emotions in the emergence of investing bulls and bears. The thing is, sometimes the world changes in such a fundamental way that there really are no antecedents.

 For example, where is the precedent for having the gangster in the White House? As a thought exercise, imagine if Al Capone could have become President in the 1930s. Here’s a man who managed to avoid being brought to justice (sound familiar?), who ran his empire using violence and the threat of violence, and who, for a time, was wildly popular among those who knew him. He was petulant and reactive; not strategic and thoughtful (again, does that sound familiar?)

As of mid March, the U.S. has surrendered its status as a constitutional democracy, as the President has effectively put himself above the law by ignoring a court order. This is unprecedented. Nothing like it has ever happened before. It’s different. The United States is no longer a country of laws, it is a country of unbridled power for the person at the top. To paraphrase a recent article in Time magazine:

“… a court that cannot enforce its rulings is not a court – it is a suggestion box…. and a presidency that can ignore the courts without consequence is no longer constrained by law – it is an untouchable executive”.

No more wind in our sales from Bond Bull market

There are other things that are different in 2025, too. For starters, the world is dealing with an existential crisis – climate change – the likes of which has never been seen before. Then there are the challenges that, while not unprecedented in history, have not been encountered in our lifetimes. Debt levels, both private and public, are at their highest level since World War II. A bull market in bonds that lasted over 40 years ended a few years ago due to the normalization of rates coming out of COVID. There will be no more wind in our economic sails, as has been the case throughout the entirety of the investing lifetimes of everyone reading this.

The peace dividend has been paid out. Everywhere throughout the world, countries are rearming because of geopolitical instability that has arisen out of autocratic powers that seem determined to acquire new territory at all costs. Not only is this destabilizing geopolitically, it also diverts expenditure into military pursuits that would have otherwise gone toward expanding the economy and/or some element of improved social justice.

Deglobalization is very much part of this new reality, too. Tariff barriers are being erected by the gangster madman, and countries around the world feel they have no meaningful recourse other than to reciprocate in retaliation, thereby exacerbating the needless self-inflicted harm. Continue Reading…

Is Technology making markets LESS efficient?

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I have stood here before inside the pouring rain
With the world turning circles running ’round my brain
I guess I’m always hoping that you’ll end this reign
But it’s my destiny to be the king of pain

– King of Pain by The Police

Image courtesy Outcome/Shutterstock

By Noah Solomon

Special to Financial Independence Hub

This may seem strange coming from a me: a quant geek who uses data, technology, and machine learning to develop and manage investment strategies, but here it is:

I believe that technology has made markets less efficient.

The efficient-market hypothesis (EMH) was developed in the 1960s at the Chicago Graduate School of Business. It states that asset prices reflect all available information, causing securities to always be priced correctly, thereby making markets efficient.

In my view, perfect efficiency is like the tooth fairy: it would be nice if it really existed, but in reality, it is purely fictional. This divide between the ivory tower and the “real world” was epitomized by the legendary Fisher Black, co-architect of the Black Scholes option pricing formula. After moving from M.I.T. to Wall Street, Black remarked, “Markets look a lot less efficient from the banks of the Hudson than the banks of the Charles.”

Bubbles: The Archnemesis of the EMH

Over the past several decades, markets have borne witness to two extreme bubbles:

  • In 1989, the Japanese stock market was trading at 65 times earnings. The aggregate value of Japanese stocks exceeded that of U.S. stocks despite the fact that the U.S. economy was three times the size of Japan’s. Soon after, things went from sensational to miserable, with Japanese stocks suffering a particularly prolonged and steep decline.
  • Little more than a decade later, the S&P 500 Index, aided and abetted by a tremendous bubble in technology, media, and telecom stocks, reached the highest multiple in its history. Not long thereafter, the index suffered a peak trough decline of roughly 50% over the next few years.

Clearly, to quote palace guard Marcellus in Shakespeare’s Hamlet, “Something is rotten in the state of Denmark.” How is it that markets experienced such extreme aberrations? I’m not sure that “crazy” is the right word, but I’m darn sure that it’s not “efficient.”

Without a doubt, periodic bubbles can be attributed to recency bias, a common behavioural quirk where investors overweigh recent information and events at the expense of considering objective facts and probabilities. This can cause people to chase recent winners and push their prices to unsustainable levels. According to famed economist John Kenneth Galbraith:

“There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”

Recency bias notwithstanding, I believe that there are other factors at play that are contributing to irrational behaviour and resulting in decreased market efficiency.

The Rise of Passive Investing & Market Efficiency: Nobody Knows

A persistent feature of markets over the past 20 years has been a secular shift in assets from active managers to passive, index-tracking funds. I do have some sympathy for the argument that this has led to less efficient stock prices. Granted, if the entire world shifted to indexing, then by definition markets would become inefficient for the simple reason that nobody would be analyzing companies.

However, this is clearly not the case, which begs the question of what percentage of investable assets need to be in passive vs. active strategies to engender a meaningful decline in market efficiency. I don’t believe that anyone can answer this question with any degree of certainty.

The Paradoxical Effect of Technology: The Wise Crowd vs. the Foolish Herd

Market manias and the related mispricing of assets seems paradoxical given the amount and speed of information that has become widely available over the past 20 years, not to mention the precipitous declines in commissions and other trading costs. However, speed and availability of information is a proverbial double-edged sword, especially as it pertains to the efficiency of markets over the medium to long term.

In theory, technological advancements, and specifically the ability to obtain and process greater amounts of information at an increasingly rapid rate, should make markets more efficient. However, these developments are not a significant factor for investment strategies with medium or longer-term horizons, for which the speed and availability of information are not particularly important.

On the other hand, technology has had a deleterious effect on the proverbial “wisdom of the crowd,” which is defined as “the notion that the collective opinion of a diverse and independent group of individuals (rather than that of a single expert) yields the best judgement.”

The catch here lies in the word “independent.” While I agree that security prices should be “correct” when investors think and act independently, this is clearly not the case when they act with a herd mentality and all run off the lemming cliff in unison. Under such circumstances, the crowd’s “wisdom” becomes anything but, which leads to manic behaviour and market inefficiencies. In a world where social media personalities such as Keith Gill (Roaring Kitty) can incite their millions of followers into frenzied bouts of groupthink, crazy things are bound to happen. Continue Reading…