Mark Hulbert Advocates Cash for the Faint-Hearted in Choppy Markets, And Assumes You Can See Them Coming

I am leery of formulaic approaches to investing and this New York Times article confirmed my prejudices. Conventional wisdown says forget market timing (you are bound to get it wrong and lose out). However, today Mark Hulbert advocates an anti-market-timing strategy: go into cash when markets become volatile.

But that seems as difficult to execute as market timing. How do you define when markets are volatile? A VIX of 30 was once seen as a very high level and would trigger buying as a sign of a near term bottom. Now, a VIX of 30 would be almost routine. It seems that you need to have foresight to know when markets are going to become volatile, and if you had foresight, you could just rely on that. Hulbert does NOT examine exiting the market shortly after it becomes volatile, which is the only realistic way to implement this strategy. Similarly, how can you tell for sure when a volatile period has ended? What measures do you use? After the LTCM crisis, swap spreads were elevated for a full year afterwards. When should you have decided it was safe to get into the pool?

From the New York Times:

Critics of market timing argue that it’s hard, if not impossible, to consistently beat a buy-and-hold approach by jumping back and forth between stocks and cash.

But new research raises the tantalizing possibility that you can do as well as the overall market — with much less risk — by parking your portfolio in the safety of cash during times like these, when market volatility spikes higher.

Market timers have yet to translate this new research into a set of specific rules for trading. But the general idea is to get out of the stock market whenever volatility measures — such as the Chicago Board Options Exchange’s Volatility Index, known as the VIX — rise significantly, and to stay in cash until they come back down.

Of course, such a volatility-avoidance strategy faces long odds. As the critics of market timing often point out, the stock market tends to produce the bulk of its gains in just a few explosive sessions. Miss those days and your portfolio’s returns are likely to disappoint you.

Consider someone who was fully invested in stocks over the last decade — except for the market’s 20 best days, during which he held cash. Despite holding stocks more than 99 percent of the time, this investor would have lost 57 percent through the end of October, as judged by the Dow Jones Wilshire 5000 index, a benchmark that represents the combined value of all domestic stocks. That is 70 percentage points worse than the 13 percent gain he would have achieved had he held stocks mimicking that index for the entire 10 years, including the market’s 20 best days.

Market-timing advocates say it’s unfair to focus only on the consequences of missing the very best days, because the bulk of the market’s declines are also concentrated in just a few sessions. For example, a portfolio fully invested in stocks during all but the 20 worst days of the last decade would have gained 215 percent. That’s more than 200 percentage points better than the return from a straightforward buy-and-hold approach.

THE volatility-avoidance strategy takes the middle ground between these two extremes. It aims to sidestep at least some of the market’s biggest down days and is willing to miss some of the biggest up days, too. Because the best and worst days tend to balance each other out during volatile times, a strategy that moves your portfolio into cash during such periods should produce long-term returns that are close to those of the overall market, while incurring much less risk.

This rough equivalence in returns has prevailed in recent years. Over the last decade, an investor who was out of the stock market during both the 20 best and 20 worst days would have gained 18 percent. That’s just a little better than buying and holding. Yet the volatility of this investor’s monthly returns would have been 9 less than the market’s.

But how can you sidestep even a good portion of the biggest down days?

A growing body of academic research has found that the periods of greatest volatility are in large part predictable. This means that the market sessions with particularly good or bad returns don’t occur randomly, but tend to be clustered together. (Perhaps the researcher most widely credited with documenting this tendency is Robert F. Engle, a finance professor at New York University who was the Nobel laureate in economics in 2003 for his work along these lines.)

The market’s behavior over the last couple of months illustrates of this clustering: By Sept. 18, the VIX, the widely followed volatility index, had climbed to what was then its highest level in five years, greatly increasing the likelihood that the ensuing period would have above-average volatility. Sure enough, 9 of the 20 biggest daily percentage losses of the last decade occurred in the subsequent six weeks, along with 6 of the decade’s 20 biggest daily gains.

But even if they’re successful, volatility-avoidance strategies aren’t for everyone. Long-term investors, for example, presumably don’t care about shorter-term gyrations, and therefore aren’t interested in market-timing approaches whose major benefit is reducing volatility rather than increasing return. Such strategies require close attention to the market, and generate higher costs than simply holding stocks for the long term.

Still, a successful volatility-avoidance strategy would appeal to many investors who have been scared away from the market, worried that they would suffer through more extraordinary fluctuations like those of recent weeks.

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  1. ndk

    What do you recommend to the vanilla, uninformed investors of the world, if not formulaic approaches? Most lack the inclination, training, or ability to make rational investment decisions. The management fees on mutual funds, hedge funds, or other professional investment services become very dear in a low nominal return yield.

    About the only asset that’s turned in a decent return over the last fifteen years is treasuries, which are now in their own bubble, and to a lesser extent still-deflating real estate and commodities. The dollar in which the treasuries are denominated hasn’t done too well, either. I miss the days when saving money in the bank wasn’t a financially suicidal choice for the uninformed and risk-averse.

    Times like these I think back to a point Keynes made: the ability to postpone consumption into the future, much less get a positive real return on assets, isn’t a God-given right. Only a sound economic system makes this possible at all. It’s a wonder we’ve had for years that often goes unnoticed.

  2. Anonymous

    Hey Doc,

    I suppose because Mark is publishing in the NYTs, rather than his Marketwatch column, you decided to comment. I consider the latter, a daily colonic in which he spews forth
    a porous paltry pander to his single guiding meter of market performance : the contraindicator.

    If gold is high, it must be time to sell, if gold is low it must be time to buy. Yeah, right whatever that all means.

    I have no idea why the NYT gave him a soap box to stand on. If you read the comments at Marketwatch daily you’ll observe he is a bit of a running joke, a misfit who is too dumb to know that he’s risen to the level of his own incompetence.

    Peter would be proud….


  3. Anonymous

    Treasury is definitely a bubble now. (thankfully, with rate so low, people realize they are losing money after inflation number is thrown in)

    What I am afraid of is when “dollar cash” bubble pops. When there is next big thing to put your money in and everybody abandoning dollar.

    That’s when the game will get VERY nasty. It’s the reverse of what happens now, when everybody is abandoning everything else and running away to dollar.

    It alls tarted with big hedges and investment group liquidating their equity and all sort of papers to get cash to pay for loans. It caused global down draft, then everybody else bailing out.

    The question now, how will the reverse unfold.

    obviously just about any country does not want flood of dollar going in creating massive inflation. Will everybody simply keep lowering their interest rates and buying dollar? (more of the same, except harder?)

    I for one think, they should simply hand everybody on the street fresh cash. .. that will really pump up the economy.

    imagine everybody in India getting $20 every sunday. Everybody in china getting $50 every monday.

    In no time will farm and light consumer industry lit up.

    This was btw, how the Japanese get out of the 90’s funk. They invest massively in china, to unload dollar.

  4. Anonymous

    Geez, why not recommend going to cash and staying there. It would have blown away any stock trading advice this column offers.

    I am sure Japanese long term investors don’t have “stock market” even enter the conversation.

    If you would have gone to treasuries at the very bottom of the 1998 LTCM bust, the last “great buying opportunity”, you’re still ahead of stocks (not even considering the drubbing that dollar-cost-averaging would have given you over the last decade).

    Average Joe

  5. Rolf

    “high” volatility could be defined as being above either the 50- or 200-day moving average rather than just as a static number. By the same token, low volatility could be defined as the opposite….

  6. CSTAR

    Consider a limiting case where everybody follows this advice.

    Viewing this as a game in normal form, the strategy profile consisting of all players using the hold cash strategy will have an interesting effect on the values of all portfolios. The market would instantly crash i.e., all market indices would be zero, since there would be no buyers.

    This is pretty much the same for any strategy of this kind.

  7. Anonymous

    Yves, I can’t possibly believe that you do not realize Mark Hulbert is an utter hack. He is the perfect example of the perfectly useless mainstream financial columnist, always slight bullish (because nobody like to read anything depressing, after all) and possessed of MOUNTAINS of data that ALWAYS contradicts itself and NEVER produces anything remotely resembling useful guidance or even thought-provoking observation.

    He’s the polar opposite of…well, you.

  8. Anonymous


    Why are you wasting your precious time and OUR time on Hulbert. This guy is a useless hack whose never had a great investment idea in his entire life. He certainly does not deserve to have his name mentioned on your great blog.

  9. Anonymous

    Part of the reason for the excess of volatility is “pundits” like Mark Hulbert who have a wide and ingenuous readership who buy and sell on every new piece of information or commentary. There is way too much “advice” on the Internet and people are jsut more confused than ever. Great for the brokers, who I imagine are doing very well recently.

  10. Jojo

    Hulbert writes his columns to sell subscriptions to his newsletter.

    Everyone is always looking for a market system/formula. Dogs of the DOW, Sell in May – buy in November, The Presidential Cycle, the alignment of the stars/planets, VIX volatility, etc.

    Some systems seem to work sometimes in some markets but there isn’t a system that works all the time in all markets, which is what lazy broker and J6P is looking for. However, like the Fountain of Youth, this doesn’t stop people from continuing to search for one. But if you find something that seemingly works, why you can sell the system to some people, build a newsletter around it and maybe even get the MSM to write about it. There is always a bigger fool.

    This is one of the best comments I’ve ever come across on the stock market:



  11. River

    Why would anyone except a gambler even consider being in stocks now? Maybe I am missing opportunities but I cleansed my portfolio prior to the Bear Sterns blow up and have not been into stocks since.

    As I see the current situation the stock market is so contorted that making a profit on equities is a simple matter of luck…and a bit of bad luck will leave one out some money.

    When the Fed and Treasury get into bed with Wall St, its time to look at cash, precious metals, or other commodities. The only people that will make money in the current stock market are lucky day traders that guess right or insiders. Lots of sheep will be sheared, of course, because there remains a pool of greater fools. At some point they will run out of money.

    The old saying goes…The market can remain irrational longer than one can remain solvent. In the present case irrationality has nothing to do with it…It is plain and simply rigged. One has a better chance on the crap tables in Vegas where the rules are not changed after each roll of the dice.

  12. DD

    To JoJo:

    The link was perfect! Thank you.

    To River who asks:

    “Why would anyone except a gambler even consider being in stocks now?”

    And therein lies the problem: The vast majority of people who consider themselves to be “investors” are kidding themselves. The 1-2% that are not gamblers are NOT, in fact, “investors”—these few are simply “The House”.

    Watch ESPN prior to a big football weekend as Chris Berman and Hank Goldberg tout their picks….and then watch CNBC or read just about every other blog that’s out there—there’s no difference—it’s all gambling.

    Let’s cut the bullshit.

    It would be so much healthier, if CNBC, NYT, and the blogs just framed the whole exercise as a gambling narrative. I think people would make more asute decisions. Before plunking down some hard earned cash on a Cramer Call…or a blogger call….an otherwise industrious, responsible person might say to himself, “Let’s pause for a moment here, Tiger. If this doesn’t work, how am I going to feel knowing I just GAMBLED a month’s salary with this ‘Lock of the Week’ play? I’m going to feel like a degenerate moron, that’s how I’ll feel.” And with this modicum of self-awareness, this person might make more temperate decisions.

    But that’s not how it goes down does it? Instead, it’s more like, “Well, these are ‘calculated risks’. I am making ‘informed decisions’. I am an investor! This one just didn’t work out, that’s all.”

    And I’m not saying that people shouldn’t put their money into the markets. If there’s some kind of edge, go for it. Just keep in mind if your “portfolio” is down…if your “returns are off”…you just gambled it away. The next time you are making an “investment”, you are simply making a bet.

    If, in addition to the loss of wealth, people also had the attendant loss of esteem by admitting to themselves that they may have a gambling problem….a healthy feeback loop might ensue, where a person says, “Sure I can accept the loss of some money. What I cannot accept, though, is that I am a gambler who is losing his money via the stock market instead of at the craps table or in a Vegas sportsbook.”

  13. Anonymous

    In such bad times, the markets to be are drug dealing, weapons smuggling as well as prostitution rings.

  14. bitter beans

    How can you discuss stock market strategy without consideration of the fact that the entire US financial system is available and put to the service of manipulating markets?

    The work of the Plunge Protection Team (Paulson, et al) never stops. Like the 7 dwarfs -off to work we go -illegally manipulating the stock market the last few years.

    Everyone who invested the last bunch of years who have had their funds automatically invested for retirement paid higher than free market prices for their stock investments.

    When are we gonna’ see a perp walk for these guys?

  15. Bob_in_MA

    Hulbert was spouting how insider investment and this or that bit of data-mined nonsense signaled it was time to buy for the last year.

    Now he is saying move to cash? Smart guy. Why are we even talking about him? Clearly, any idiot can now have a column in the NYT. Hell, Ben Stein is in there!

  16. Anonymous

    The stock market is nothing more then a ponzi casino mania that grips the many who believe the good life comes from speculation. The daily news flow that report the up and down of the index’s is a reminder that our economy has lost its steering and acting like a chicken with its head cut off.
    The stock market has long lost its ability to be a creditable source of funding for business expansion rather it relies on fresh green to fuel the bonus and lifestyle of the few.

  17. Anonymous

    he is pointing to an issue I have been thinking about a lot lately: the wisdom of long term buy and hold strategy. I have been told countless times that the best strategy for a passive investor is buy and hold dollar cost averaging in index funds. But I started to realize that for a guaranteed positive return, long term can mean decades, and I don't have that much time. As he points out, long term stockmarket returns depend on being invested during that one bull market your life will probably experience. If you look at the Dow or S&P index, the last century had only three bull markets: during the roaring 20s, after WWII until 65 and from 85-98. During the other years, buy and hold strategy was pointless. So the real question is how to be able to predict a bull market. It seems they are caused by major socio-economic events: end of WWII and the start of the IT revolution in the 80s for example. So with nothing similar in the pipeline currently, I think its safe to say that we will remain in a bear market until a major new socio-economic event will reshape our society. until that time arrives, which can be decades away, buy and hold strategy won't work and passive investors are probably better of staying out of the stock market.

  18. William Mitchell

    One formulaic decision rule that seems to work: long-term regression to mean price/earnings ratio.

    Over the past 100+ years, broad US stock indexes seem to regress over time to about 16. This probably implies some logical risk-adjusted yield on earnings and earnings growth.

    As a result, 20-year index returns can be somewhat predicted by the index P/E ratio today. You can prove this yourself by regressing the data at Robert Schiller’s faculty Web page (

    When you buy below PE=16, your 20-year return is much better than when you buy above that level.

    In the past month, for the first time since 1996, index PE is well below 16. This argues it is time to begin averaging into an index fund, a little each month.

    No way to tell WHEN a turnaround will come. Maybe years. This merely argues that the ODDS of a good long-term return are much better right now than they were a few months ago.

  19. Not_a_REAL_American

    The American peasantry is depending on their 401k for retirement. AND, these peasants have the fantasy that the stock market will allow their 401k’s to prosper. If this prosperity doesn’t happen, allot of peasants are going to start questioning (yet another) part of their American mythology. When too much of a mythology is called into question, bad things happen; like when that last 5-year plan was “doubted” in the old USSR. As Mao noted: peasants having doubts is NEVER a good thing.

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