Timing the market – how feasible?

How much does not timing the market affect you? Look at this chart (Info from Fidelity Investments). It shows the effects of missing the 10 best days of the market can have on your portfolio – cut your portfolio value into half. Well, such a great timer who can call all the best days correctly will obviously be a God in Investing, but it is impossible! Moreover, this portfolio does not seem to show the effect of calling just 10 days incorrectly for your investing career!

A simpler way is obviously to look at the value of the companies you invest in and see if the price makes sense on the long term perspective? If it does, go ahead. If it doesn’t, chuck it! Or, one can simply do dollar cost averaging all the way through for at least 10 years. That can obviously give you a good advantage in terms of cost while spending least amount of time. The time would have been spent on just initially choosing a stock that can survive the competition for 10 long years (in today’s world!). As this guy de Aenlle says, such studies are not rooted in realities on ground:

“The problem with this study, and others like it, is that they have little grounding in real-world investing,” he wrote. “For example, as far as we know, no one with both feet on the ground has ever put together a market timing system without considering how it would have done in the past. Obviously, every system is going to miss some up moves, but you would have to be an incredibly perverse genius to miss every good month in 62 years.”

But he cites another piece of research discussed by a Merrill Lynch Chief Market Analyst:

That study, published in 1974, found that employing a timing strategy – in which an investor was in all up markets and out of all down ones – would have turned $1,000 into $85,000 between 1940 and 1973. Not bad. But if the same investor had been able to stay in the market the whole time, but always in the best-performing industry group, he would have seen $1,000 grow to a staggering $4.3 billion. Not bad at all.

The problem here is that in market timing, there are two choices, while there are dozens of industry groups. Standard & Poor’s ranks close to a hundred of them now, although there undoubtedly were fewer several decades ago.

“That’s just another game people play,” Mr. Weber said of the study. ” ‘If you’d been in that investment, you’d have done well.’ Looking back is always easy; in the future, you’re looking into a black tunnel.”

As they say, hindsight is always 20-20!