Is it time to time the stock market?

DETROIT — With the Dow Jones Industrial Average closing above 14,000 for the first time last week, an increasing number of financial advisers are considering the merits of market timing. To be sure, the relative security of cash and bonds appeals to a growing number of advisers who believe that the current bull market is poised for a downturn. “We’re trying to be more cognizant of the risk-reward ratio of this market,” said Andrew Tignanelli, president of The Financial Consulate Inc. in Lutherville, Md. Mr. Tignanelli, whose firm oversees $165 million in client assets, has started shifting client portfolios away from stocks. In fact, he has increased his portfolio allocation in cash and bonds to the 35% to 40% range, from 10% to 15%. Like other advisers who are feeling uneasy about the current run of the Dow, which has gone more than five years without a correction of 10% or more, Mr. Tignanelli is no longer comfortable with the overall price of equities. “We very rarely make these kinds of moves,” he said. “But right now, there seems to be a lot of optimism in the market, and the risk-reward ratio is getting extreme.” F. Dennis De Stefano, sole proprietor of De Stefano Wealth Management of Kihei, Hawaii, has adjusted portfolios away from domestic stocks. Some of his portfolio adjustments include doubling cash exposure to 10%, reducing the U.S. equity position to 35%, from 40%, shifting from moderate-duration to short-duration bonds, and increasing the international-stock allocation to 30%, from 25%. Also, he adjusted his exposure to international bonds by slightly reducing his allocation to foreign bonds that hedge the U.S. dollar.
Portfolio adjustments Mr. De Stefano, who takes issue with being compared to a market timer, said that this marks the first time in 15 months that he has made any significant portfolio adjustments. “People are retaining us to manage their money, and I recognize what can happen in a bear market,” he said. “Ninety-five percent of the advisers who provide asset management don’t market-time, but they go to the other extreme and put their head in the sand by re-balancing just once a year.” To buy-and-hold investment purists, portfolio adjustments of the type advisers are now making can be characterized as market timing. “They’re just blowing smoke, because there’s no efficacy to active management,” said Jeff Broadhurst, president of Broadhurst Financial Advisors Inc. in Lansdale, Pa. “It just comes down to people thinking they know which way the market is going, but they’re just trading on fear and greed,” he added. Mr. Broadhurst, who advises primarily on a flat-fee basis, has adjusted client portfolios only as part of a regular re-balancing process, not in response to the direction of the overall market. “I’ll put the portfolio back to the originally agreed-upon allocation,” he said. “It’s a very unemotional way to do it, and it’s not forward looking.” Some advisers are simply more comfortable with the buy-and-hold mind-set, according to Rebecca Preston, a sole proprietor in Providence, R.I. “My philosophy is to diversify and hang on,” she said. “Sometimes I can tell when the market looks overvalued, but I never know when to get back in.” Ms. Preston, who works with clients on a retainer basis, said she avoids taking on clients who want to time the market. But with the Dow testing the 14,000 mark for the first time, and Standard & Poor’s 500 stock index also setting a new record last week, even some hardcore market timers are not sure which way to turn. “We’re finding opportunities in all the industries, but the risk for active managers is growing substantially,” said Peter Mauthe, president of Rhoads Lucca Capital Management Inc. in Dallas. Market warning One indicator of the increased risk of a stock market downturn is the growing number of stocks that are not participating in the broad index rallies, said Mr. Mauthe, who manages $140 million for clients. For true market timers, or active traders, opportunities will present themselves in virtually all market conditions. “If you’re an active manager, you try to make money in both directions, and I like a market that moves,” said Paul Schatz, president of Heritage Capital LLC in Woodbridge, Conn. He described the current market as a momentum driven “melt-up” that is defying all manner of fundamental, technical and quantitative analysis. “This is a rare period where momentum is dominating the market, and you have to get on that right side and stay on that side,” said Mr. Schatz. “The bad part is, momentum-driven markets never end well.” Recognizing and reacting to such market conditions is part of an adviser’s fiduciary responsibility, according to Don Martin, president of Mayflower Capital in Los Altos, Calif. “I adjust whenever I see happenings in the market,” he said. “Buy and hold is not thinking.”