Revisiting the Fisher and Statman Study on Market Timing

Abstract

Valuation-based market timing demonstrates greater potential to improve risk-adjusted returns for conservative long-term investors than given credit by Fisher and Statman (2006). On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks buy-and-hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns. Also, defining market timing as either 100 percent stocks or 100 percent Treasury bills does not provide a hedge against the possibility that valuations may depart from their historical averages for extended periods.

Keywords: market valuations, cyclically-adjusted price-earnings ratio, PE10, stock returns, market timing, long term, tactical asset allocation, buy and hold

JEL Classification: C15, D14, G11, G14, G17, N21, N22