If you're any kind of long-term mutual fund investor, worrying about timing the stock market is a wa...
If you're any kind of long-term mutual fund investor, worrying about timing the stock market is a waste of time.
That old precept gets a fresh coat of varnish from a study just published by Charles Schwab & Co, the San Francisco brokerage firm that sells the funds of many management firms.
I can be as sceptical as the next guy of 'studies' issued by anybody with a stake in the subject. You know, like Investment Firms See Retirement Savings Shortfall, or Problem Requires Further Study, Says Research Group.
In this one, though, there's no blatant special pleading. What it does contain is a forceful reminder that trying to outmanoeuvre the stock market is not only futile but unnecessary.
"It's tempting to wait for the 'best time' to invest," said Bryan Olson, a director of Schwab's Center for Investment Research, which did the study. But "the best course of action for most people is to invest at the first possible moment, regardless of the level of the market."
Olson reached that conclusion by calculating the returns that would have been achieved by four different investors, each of whom had $2,000 to invest every 31 December since 1979. All are committed to a buy-and-hold approach, but each follows a different strategy.
A is a pro at picking prime moments to buy, waiting and putting the money into the Standard & Poor's 500 Index at its lowest monthly close every year. B invests immediately each time, on 31 December. C, terrible at timing, buys at the highest monthly close in the ensuing 12 months. A and C invest in Treasury bills during the periods while they're holding money back from stocks.
D, suffering from paralysis by analysis, waits forever for a better buying opportunity, and thus winds up with whatever return he gets from Treasury bills year after year.
After 20 years, at the end of 1999, A, the one with the perfect timing touch, has a nest egg of $387,120; B, who simply bought right away, has $362,185; C, the timing incompetent, has $321,569, and D, the perpetual procrastinator, has $76,558.
No surprise - the timing whiz fared best. But the reward for all this skill was a paltry 6.9 % more than B's robotic method, and B's system involved much less effort.
You might opt for A's method anyway, if it could be done with any reliable success. But of course it can't - picking the best times to buy and sell stocks is famously harder than it looks.
Being fallible, many people are likely to find themselves in C's shoes when they try to put on A's. The good news is that they still make out quite nicely when that happens.
The big danger in trying to time the markets is not that you'll choose unwisely, but that you'll never move at all, and wind up with D's results. The cost to D of trying to avoid C's fate: Giving up 76.2 % of C's proceeds.
As Olson points out, this is vivid evidence that procrastination can do much more damage to an investment plan than poor timing. The worst mistake, quite often, is to try never to make a mistake.
"Hold on there!" someone will surely say. Schwab's findings come from one of the greatest bull markets ever, which nobody could have foreseen.
Of course stock returns look great in this setting.
To answer such objections, Olson repeated the test for every 20-year period since 1926, exposing the four hypothetical investors to a varied climate.
Of these 55 periods, 49 produced the same order of finish - A with the best return, B second-best, and so forth. In four others, D fared better than C, and in one other, D outperformed B and C.
Only once did D, staying out of stocks, get a better return than all the others - in 1955-74, a stretch that ended with a hellacious two-year bear market.
Your odds of coming out ahead with B's robotic investing approach over D's indecision were 53 to two, or 96%.
I'm sure you can make a persuasive case that the next 20 years probably won't bring stock returns as good as we saw in the last 20. If you do, make sure to try it out on our friend D. He loves that sort of talk.
Chet Currier at Bloomberg New York
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