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Retail Investor .org |
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TIME IN THE MARKET BEATS TIMING THE MARKET ... FALSEVariations on this warning are heard from advisors: "All the market's returns in a year come from just a few days. If you are not invested on those days your returns are zero.". It is a perpetual refrain (example). Clearly it is in the self-interest of advisors that we believe this. They know that once you exit the market you may not return TO THEM. Regardless, they lose their commissions in the interim. They want you to believe it cannot be done. Maybe there are valid arguments to prove that market timing cannot be done, but THIS argument is false. It is false because, if returns are REDUCED by missing the few biggest up-days, then returns must be INCREASED by missing the few biggest down-days. Advisors never tell you the potential gains from market timing. It should be obvious that the market-timer's objective is to avoid the down-days, not the up-days. Yet this argument relies on statistics that assume you will accomplish the exact opposite of your intentions. An assumption of failure cannot be the starting point for any logical proof that market timing will not work. The assumption ensures the wanted (wrong) conclusion. Consider also the period of time used in the argument - most frequently a single day. Technically 'market-timing' could be applied to everyone except buy-and-hold indexers, but mostly it is used in reference to investors who adjust their asset allocation according to changing economics and broad market sentiment changes. These investors don't exit and re-enter daily. They will exit the market for weeks and months, not days. The choice of 'days' in this argument ignores reality. So what are the benefits from exiting the markets during the worst down-months? Robert Shiller's monthly data on US markets has been used on the last three sheets of this spreadsheet (Excel or OpenOffice). The percent returns were calculated and sorted. The most extreme (up-month and down-months) 5 and 10 percent were deleted as if the investor had exited the market. The resulting returns were calculated assuming three scenarios compared to a buy-and-hold investment.
Financial advisors use only the bottom numbers in their argument, assuming you accomplish the opposite of your objective. It is no surprise the returns have been wiped out. But the objective was to miss the down-markets, and the data shows perfect foresight would have doubled your returns. What is surprising is the returns when investors exited the market on all the worst down-months but also missed the best up-months. The returns were better than the buy-and-hold strategy. Be clear that no one says this analysis proves anything useful. Obviously no one knows ahead of time which months will have great returns, and which will post losses. What it proves is that this argument is bogus from start to finish. | |||||||||||||||||||||||||||||||||||||||||||||||