Timing is Everything

They say timing is everything, and in the market that couldn't be more true. To illustrate this point, the chart below shows how an investor who invested one dollar in the market in 1966 would have fared under four different scenarios. First we looked at, buy and hold. Then we wondered what if someway, somehow an investor was nimble enough to miss out on the five worst days each year, or if he was truly unlucky, how he would have fared if he missed out on the five best days of the year. Finally, we looked at how the investor would have fared if they missed the five best and worst days of the year.

This chart perfectly sums up why so many people try (and usually fail) to time the market- you can make a lot of money doing it ($1 invested in 1966 would be worth almost $2,000 today). However, missing out on the five best days of each year would have landed you in the poor house ($1 invested in 1966 would be worth $0.09 today). At the end of the day, the most likely scenario is that most people trying to time the market will probably miss out on some good days and some bad days, ending up with just about the same amount of money (before commissions and taxes that is) as someone who bought and held the entire time.

Comments

[JohnM]

Yes, a timer will miss out on the strongest up days because they usually occur after the strongest down days; a good timer will not get fatally whipsawed by the markets. But your conclusion that you will end up with the same amount of money as buy&hold is rather cavalier. If a timer can hold his draw-down in a bear market to say –20%, while the B&H investor takes a –35% hit, the timer has a much better shot of recovering quicker than the B&H.

Risk management is the key, and most B&H investors are pretty lousy at controlling risk (see Janus funds, Putnam funds, et al in the early 2000s).