International Portfolio Diversification and the Magnitude of the Market Timer's Penalty

J. OF INTERNATIONAL FINANCIAL MANAGEMENT AND ACCOUNTING, Vol. 6 No. 3

Posted: 5 Jul 1998

See all articles by Kirt C. Butler

Kirt C. Butler

Michigan State University

Dale L. Domian

Memorial University of Newfoundland (MNU); York University - School of Administrative Studies

Richard Simonds

Michigan State University

Abstract

Market timers without timing skill suffer a penalty relative to buy-and-hold investors in the form of higher portfolio risk. With transactions costs, timers suffer lower expected returns as well. We derive the magnitude of this penalty for a timer randomly switching funds between two or more risk assets. Assuming costless trades, a U.S.-based timer randomly switching between U.S. and Japanese national stock funds can expect to face a 26.2% higher standard deviation than a comparable buy-and-hold investor at the same level of expected return. A timer randomly switching between a globally diversified equity portfolio and U.S. T-bills faces a 50.3% higher standard deviation of return than a comparable buy-and-hold investor.

JEL Classification: G11, G15

Suggested Citation

Butler, Kirt C. and Domian, Dale L. and Domian, Dale L. and Simonds, Richard R., International Portfolio Diversification and the Magnitude of the Market Timer's Penalty. J. OF INTERNATIONAL FINANCIAL MANAGEMENT AND ACCOUNTING, Vol. 6 No. 3, Available at SSRN: https://ssrn.com/abstract=7328

Kirt C. Butler (Contact Author)

Michigan State University ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States
517-432-0035 (Phone)
517-432-1080 (Fax)

Dale L. Domian

Memorial University of Newfoundland (MNU)

Faculty of Business Administration
St. John's, Newfoundland A1B 3X5
Canada
709-737-4632 (Phone)
709-737-7680 (Fax)

York University - School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3
Canada
416-736-2100, x20009 (Phone)
416-736-5963 (Fax)

Richard R. Simonds

Michigan State University ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States
517-432-0773 (Phone)

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