Can you Really Profit from Market Timing?

When I was advising my clients about investment strategies as part of their overall financial plan, most of the advice related to buy and hold. Of course the advice was tailored to each client’s individual need but most of my clients were at a stage in life that they had the ability to have a long-term strategy. It makes sense, for example, my retiree clients were at the distribution stage of life. It was my job to make sure they didn’t outlast their investment income. With my investment planning advice my clients were able to get a long-term strategy that got them exceptional growth in their portfolios for their risk tolerance.

A smart long-term buy and hold strategy optimized for Alpha will not only overtake majority of professionally managed money but market timers as well. You can’t consistently time the market and profit unless you have clairvoyance or inside information.

So, if you don’t meet the above criteria of profitable market timing, don’t attempt it, the odds are not in your favor. Even if you attempt to use economic data or technical data, it is a fruitless exercise.

It is impossible to time the market unless you are in the know of some kind of inside information. Of course, you can be lucky, like winning the lottery but to have a winning streak continuously is untenable.

Let’s evaluate why the S&P 500 beats individual stock investing. In the nineteen years between 1986 and 2005, the S&P 500 compounded at an annual rate of return of 11.9%, this return includes the tech bubble implosion of the 1990s, 9/11, and War on Terror. If you would have invested $10,000 in the index during that period it would have grown to $94,555. However, a Dalbar report shows that an average investor would only have a growth of $21,422 over the same period, a return of only 3.9%. The simple reason is market timing.

When markets have a downturn, investors don’t want to buy but that is the best time to buy low and the make the biggest profits when the market recovers.

Additionally, another component of successful investing is how long you are in the market. Analyzing data from 1990 to 2005, Bloomberg and American Century Investments discovered that a $10,000 investment would have increased to $51,354 with simply holding the investments from beginning to end.

On the other hand, if you would have bought and sold and missed the best 10 days in that 15-year period, your returns would have only been $31,994; if you would have missed the best 30 days, your growth would have been a paltry $15,730.

Famous Nobel laureate William Sharpe of the Sharpe ratio fame stated that market timers had to be correct an incredible 82% of the time to match the returns obtained by buy-and-hold investors. So while the long-term investor is holding tight, the market timer is trying to guess the best time to get in or out of the market.

Successful investors like Warren Buffett, Peter Lynch, Shelby Davis have shown that buy and hold with a long-term vision works, market timers would have difficulty coming up with a similar list of iconic investors.