Market Timing for the Individual Investor

Using the Predictability of Long-Horizon Stock Returns to Enhance Portfolio Performance

Abstract

Recent research indicates that dividend yield and earnings-price ratio can partially predict long-horizon stock returns. We examine whether individual investors can successfidly construct timing portfolios based on either of these variables or a measure of the expected market risk premium. The out-of-sample tests in this study require that investors rely only on information that was available at the time of the market-timing decision. Timing portfblios based on the market risk premium show the strongest abbility to rime the market. We present an economic rationale for the results that is consistent with efficient markets.