Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on May 31, 2011. I next heard from Wade on August 12, 2011.
Wade shared with me “the referee report” for his research paper on the Fisher/Statman paper showing (incorrectly, according to Wade’s research) that long-term market timing does not work.
The report stated: “To me, the elephant-in-the-room question is: what is the ultimate criterion for one to conclude with confidence that one strategy is better than the other? Or, put it in another way: should the data last longer, can we have a better idea what will happen? Not really. We need look no further than Figure II to appreciate the challenge: up to 1930, 100% stocks buy-and-hold was superior; from then to mid 1990s, the market-timing strategy fared better; they switched positions again after approximately 2008. It is disappointing for a reader to think that all the difference is only due to the choice of end period.”
It added: “This is not just an abstract question of intellectual interest, for an individual with finite years of life wants to know for sure, given the cohort she is in, what is the optimal investment strategy for her life of 80 years or so. Barring from an altruistic bequest motive, one cannot care less what’s the portfolio value 150 years later. Even though it may be unfair to demand a satisfactory answer from the author (F&S does not remotely address it, either), it would be nice if the author can feature his analysis with this backdrop in mind.”
It continued: “As market timing strategy incurs more transactions costs, is it still dominating buy-and-hold after taking into account of reasonable transactions costs? As the balance grows, the associated transactions costs may not be easily dismissed. Moreover, considering that in earlier years there were no index funds available, how could an investor, even a buy-and-hold type, implement the strategy without piling up substantial transactions costs? A hypothetical percentage transactions cost scheme would be a good start.”