Academic studies show that you should not attempt to time the market; you may miss the good times if you do.
This is the buy and hold proponent’s favorite argument. Yet there is more to this study that offers another, very important point of view. An investment in the S&P 500 Index for the period 1990 to 2008 in a buy and hold mode returned 5.0% annualized, yet if you missed only the 40 best days each year your returns would have been an annualized loss of -4.92%; case closed, timing does not work. Wait a minute!
Let’s look a little further. If you had instead missed only the 40 worst days each year during that same 1990 to 2008 period your investment returns would have skyrocketed to 16% annualized per year, more than triple the rate of return of the buy and hold strategy. What would happen to investment returns if you missed both the best and worst 40 dayseach year during that time period? Interestingly, when missing both the best and worst 40 days each year in that 1990 to 2008 period the investment returns were still better than the buy and hold; only by a small amount, but better. This is very interesting and here is the reason why: It was associated with what we learned in fifth grade math class, that percentage losses require larger percentage gains to recover the losses. To recover a 30% loss one must make 43% to get back to even. Protect against large downside losses and perhaps over time I will have a better investment experience.