What Wall Street Doesn’t Want You To Know About Market Timing

We have been talking about whether or not it is a good idea for you to move a portion or all of your money to a safe place because of what is happening in the stock market. Basically, that is referred to as market timing. You are attempting to pick the best time to take your money out and then the best time to put it back in.

Wall Street says it is a horrible strategy and one at which investors never can succeed.

A Barron’s article in the fall of 2001 published an article that showed what an investor would have made if invested in the S&P 500 index from February 1966 through October 2001. During that 36-year period, an initial investment of $1,000 would be worth
$11,710.

A study done by Birinyi Associates performed a compliment study to the one in Barron’s. They stated that if an investor missed the five best days every calendar year, that the
$1,000 would have shrunk to $150.

Now, the second part of their research went the opposite way. What if the investor had been invested in all but the very worst days in those years? The $1,000 would have grown to $987,120.

Merriman Capital Management cites another research study. “If you invested $100 in the stock market in 1926 and simply kept your money there through 1993, your investment would be worth $80,000. If you tried to time the market and “missed” the 30 best months, your $100 would have grown to only about $1,200.”

In the same study, they ran a study where you were invested in the same time period and missed the 30 worst months. That initial $100 would have grown to $8.6 million.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.