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Foggy Crystal Balls


Economic Trends

FOGGY CRYSTAL BALLS

It's a well-known fact that market timing--the ability to move in and out of the stock market in anticipation of market shifts--can pay off big. Indeed, hundreds of investment newsletters specialize in recommending allocations of cash and equity holdings to capitalize on just such pending market shifts.

To assess the value of such advice, economists John R. Graham of the University of Utah and Campbell R. Harvey of Duke University reviewed asset allocation recommendations made by 237 investment letters over the period 1980-1992. They found that 75% of the letters underperformed buy-and-hold portfolios based on the Standard & Poor's 500-stock index--and some gave remarkably poor advice. For example, the high-profile Granville Market Letter-Traders produced an average annual loss of 1% over the 13 years studied, compared with a 15.9% average gain for the S&P.

The researchers also found little evidence that the letters' recommended equity weights increased before market upturns or declined before downturns. If a letter's advice beat the market for two years running, it stood less than a 50% chance of doing so for a third year. But if it performed poorly for two years, it had a 70% chance of doing so again.

"There are undoubtedly some excellent market timers out there," sums up Harvey, "but unfortunately most of them don't seem to write newsletters." BY GENE KORETZ


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