5 February 2019, 05:01 GMT
By John Authers
Out of Time: Barry Ritholtz’s Weekend Reads included this gem from Albert Bridge Capital. To illustrate the futility of market timing, they compared a strategy of annually investing $1,000 in the S&P 500 at its low for the year every year, with a strategy of buying the S&P at its high each year. The former involves impossibly good market timing. This is how it would have done:
Now, look at the returns made by the sucker who went in at the top each year:
The good market-timer did better, as was mathematically certain. But the gap between the two is minimal given the kind of effort (or extraordinary luck) needed to invest at the best time each year. As Albert Bridge put it:
So the difference between the perfect idiot and the man with perfect foresight, is the idiot has nearly 80% of the nest egg as the impossibly accurate market-timer.
So, not only can you not pick the perfect day to invest, there isn’t even a whole lot of upside from trying!
This might be a bit unfair. Market timing is not just about when to buy stocks; it’s also about choosing when to buy something completely different. Leaping into an uncorrelated asset class every time stocks are about to fall might look more impressive.
But overall the point is well taken. Much equity market commentary, from journalists and brokers is alike, is implicitly about gauging whether this is a good time to put spare capital into the stock market and whether this is a dip to buy. And that kind of speculative timing, beyond being close to impossible, is not worth the effort.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
John Authers at firstname.lastname@example.org
To contact the editor responsible for this story:
Robert Burgess at email@example.com