To Time or Not to Time?
- Joshua M Brown
- November 7th, 2011
That is the question. At my shop we don’t do 100% long or 100% out, we think it’s a sucker’s bet. But we do believe there are times to raise and lower exposure.
Here are a pair of studies that different people will chose to reference, depending on what they do for a living on The Street (advisor, broker, wholesaler, asset gatherer, strategist, trader etc)…
Consider, for example, an analysis by T Rowe Price, based on the S&P 500, a popular benchmark for measuring the performance of the stock market: If you could have been fully invested in the index from December 31, 1995 to December 31, 2010, your annual return would have averaged 6.76 percent based only on the 500 stocks’ prices – that is, excluding their reinvested dividends (which are included in total returns).
If you had missed being in stocks on the market’s 10 best days of those 15 years, your average annual return would have only been 1.93 percent. If you had missed the 20 best days, your average annual return would have been minus 1.19 percent.
On the other hand, consider the findings of a Vanguard research paper, which looked at S&P returns (averaging 5 percent annually and also excluding reinvested dividends) during a much longer period, 1928-2008. Missing either the 20 worst or the 20 best trading days in the 81-year period would have increased or decreased an investor’s overall return by approximately 50 percent, the report says.
So, which is it? Buy and Sell using your brain or just suck it up and hold forever?
More worried about missing the best days or the worst days? Now you have ammo for either choice. Try not to blow your brains out with it.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.