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The Fool's Game of Market Timing
You will often here people say that “time in the market, beats timing the market," but why?
Does it not make more logical sense to buy when the market is low, then sell when it is high and repeat?
-A THREAD-
You will often here people say that “time in the market, beats timing the market," but why?
Does it not make more logical sense to buy when the market is low, then sell when it is high and repeat?
-A THREAD-
In 1975, Professor William Sharpe wrote the paper "Likely Gains From Market Timing".
In order to beat a passive portfolio with a similar level of risk, he found that a market timer would need to be correct at least 74% of the time when deciding to go in or out of the market.
In order to beat a passive portfolio with a similar level of risk, he found that a market timer would need to be correct at least 74% of the time when deciding to go in or out of the market.
@CXOAdvisory is an organization that has tracked the performance of market forecasters to see how accurate they are.
From 2005-2012 CXO Advisory found none of the market timers they tracked could meet the 74% minimum requirement.
The average being only a 47.4% accuracy.
From 2005-2012 CXO Advisory found none of the market timers they tracked could meet the 74% minimum requirement.
The average being only a 47.4% accuracy.
The challenge of market timing is two-fold.
#1: Making sure you are in the market on the good days.
#2 Making sure you are simultaneously out on the bad days.
Even harder for these guru's is being in the market on the very best days, and out on its very worst.
#1: Making sure you are in the market on the good days.
#2 Making sure you are simultaneously out on the bad days.
Even harder for these guru's is being in the market on the very best days, and out on its very worst.
Professor Nejat Seyhun discusses in his paper "Stock Market Extremes And Portfolio Performance," that from 1963-1993, 95% of the markets gains were from only 90 trading days.
That is an average of only 3 days per year.
Good luck predicting those days on a consistent basis.
That is an average of only 3 days per year.
Good luck predicting those days on a consistent basis.
What should be obvious to investors is that no one can see the future.
Anyone claiming to have such an ability should be looked at with great skepticism.
Staying in the market is the best and most efficient way to capture the equity premium investors are looking to gain.
Anyone claiming to have such an ability should be looked at with great skepticism.
Staying in the market is the best and most efficient way to capture the equity premium investors are looking to gain.
So next time you hear someone in the news/media screaming about the next market crash or the next 10 year bull run, remember to stay consistent with your long-term strategy.
Your retirement will thank you!
Your retirement will thank you!
