HUMMONEY - The Falacy of Market Timing (Perspective)

- by Greg Lewin

There was a study done in the 1990’s which examined the stock market performance of the 1980’s. It looked at the 2528 trading days of the decade which produced a 17.5% annualized return for the S&P 500, and then subtracted the 40 best days. As amazing as this will sound, subtracting the 40 best days reduced the annualized returns on the S&P to 3.9%. To state simply, less than 2% of the days accounted for over 75% of the annualized performance of the decade.

Now I have not seen a similar study of other decades and we all know the character of markets have changed considerably, but I will assert that a decade is a meaningful sample size and if this study is not entirely sustaining in merit it certainly warrants considerable attention. If we are to gain wisdom from this information, what is it?

Simply, the exercise of market timing is a poor use of your time as an investor. For any task which demands that you correctly locate 2% of the possible choices is a poor game to play, let alone invest time and money in. To me this is a great observation because it clearly eliminates an investment strategy from consideration, further narrowing the choices to which you allocate your time and resources. It may also help you avoid the mistake of market timing if you find yourself drifting toward this behavior.

Remember market timing is the constant buying and selling of stocks with your view of the market’s short term direction as the determining factor. This does not preclude market views. It simply advises against changing them frequently in order to capture short term gains.  

 ---The views expressed here are of the author, HUMMoney contributor Greg Lewin; currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.