Timing Science Investments

Three Key Numbers

There are three key numbers that should be considered for any potential investment:

• Average Yearly Return,
• Statistical Loss, and
• Recovery Period.

These three numbers provide the good, the bad, and the ugly for an investment. Most investors are familiar with the first number - Average Yearly Return - but few have heard of the other two - Statistical Loss and Recovery Period - which are equally important.

Average Yearly Return

Average Yearly Return gives the effective annual percentage change in an investment tracked over a number of years. Investors would like to see this number be as large as possible for their investments.

As with most things in life however, there is generally a down side to an investment that generates a large yearly return. The down side is that a greater return generally comes with greater price swings or volatility, and so a risk of greater losses.

These price swings or volatility traditionally have been characterized in the financial community by the quantity called "beta". Beta was derived from linear regression analysis comparing behavior of an asset to returns from a portfolio of assets. Specifically beta is the ratio of the standard deviation of an asset price over some period of time compared to the standard deviation of the value of a selected portfolio, times the correlation between the asset and portfolio.

Typically the Standards and Poor 500 index is used as the reference portfolio. Although useful for regression analysis, beta is a complex parameter, certainly not intuitive, and also difficult to relate to actual risks individual investors face in making investment decisions.

Statistical Loss

Statistical Loss provides a much simpler, intuitive and directly relevant quantity for investors to considered when making investment decisions. Statistical Loss gives a measure of the loss extremes for an asset, complimenting the Average Yearly Return.

A loss is the percentage decrease in the investment value from its most recent past peak.  It can be tabulated day by day, very similar to investment returns. Generally as the Average Yearly Return increases (the good), so does the Statistical Loss (the bad). The question then is what Statistical Loss is acceptable, and given that level what is the highest earning portfolio available.

Statistical Loss is given by three loss standard deviations past the average loss for an asset. From statistics it can be shown that at least 89% of the losses will be less than this amount. Statistical Loss therefore gives a direct way for an investor to understand the level of loss risk for an investment.

Recovery Period

Recovery Period gives the important last piece of the puzzle for an investor. It provides a measure of the time, in years, required to recover from a Statistical Loss, assuming the Average Yearly Return for the period following the loss.

So just as Statistical Loss gives the level of the loss risk of an investment, the Recovery Period provides an estimate of the consequence of incurring that loss - by giving the years needed to recover back to the original investment value (the ugly). It is calculated by the following equation:

Recovery Period = - ln(1 + SL) / ln(1 + AYR),

where SL is the Statistical Loss (a negative number), AYR is the Average Yearly Return, and ln is the natural logarithm.

Tabulated Values

The Average Yearly Return, Statistical Loss, and Recovery Period have been tabulated for each of the equity timing results listed on the TIMING RESULTS page.  This provides an easy way to compare different investment options.

Investment Timing

Serious investors time their investments to make good buying and selling decisions - it is just a matter of what timing system they use.  At Timing-Science we've developed two proprietary timing systems.

When there is good volume data available, a proprietary accumulation & distribution (AD) timing model is used.  This model looks for indications of people buying into the fund or equity (accumulation), or selling (distribution), and makes a corresponding "buy" or "sell" call.

When there is no or insufficient volume data, a proprietary price-trending (PT) model is used for the trades calls.  This model looks at the historic price performance and variability to make a determination of whether the fund or equity is currently in a upward "buy" trend, or a downward "sell" trend.

Portfolio Construction

In addition to having a good timing system, constructing a good portfolio of different equities and funds is also very important to reaching your financial goals.  More on this topic will be added in the future.