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Timing the stock market?
There is always noise in the stock market: news headlines, economic data releases, bearish analyst views, geopolitical tensions… which provide solid reasons for investors to consider timing the market — sell stocks, hold cash, and wait for a market dip.
At the same time, there is also ongoing debate about whether market timing is possible or not. Professionals such as analysts and strategists often express strong feelings that they’re almost certain that the market is due for a pullback. However, based on historical outcomes, most of these predictions are good stories to read rather than what really happened — these stock experts just can’t forecast the market based on their own economic indicators or analysis, which is no surprise.
In this discussion, let’s assume you’re an investor without the real ability to predict market movements.. but always do some timing.
So what are the potential impacts (holding cash from time to time) on your long-term returns?
SP 500 as an Example
Assume that investors do 10% of timing (called them “10% timing investors”) during the 1990 -2023 period on daily basis (any single day, there is a 10% chance the investor would sell the SP 500 ETF, put it in cash, and reinvest into SPY the next day).
We simulate this logic 20 times (shown as colored thin lines) and plot them against the cumulative returns of the SPX index (highlighted in thick red).
Over the ~30 years horizon, yes there are a few investors manage to “time the market” successfully and outperform the SP 500. However, the majority of cumulative lines either fall below or well below the SP 500.
Let’s further expand the simulation to include 1000 investors, and calculate the distribution of investors based on whether their returns improved, remained flat, or worsened compared to the SP 500.
It’s clear and simple: only 4% of investors (the lucky ones) managed to outperform the SP 500 by their timing activities, while majority of simulated…
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