Proof (Using 24+ Years Data) that Market Timing May Not Be Worth the Effort…Atleast for Us

I know people who have an uncanny knack of making correct calls (with almost perfect timings) in markets. And surprisingly, they are right more often than they are wrong. This surprises me as almost all wise investors are of view that average investors should not try to time the markets. Maybe I am wrong in putting these people in category of average investors. 🙂

Jokes apart, I feel that making correct calls and making money in markets are two very different things. And as far as timing is concerned, I think that timing the markets is very tough, if not impossible. And as an extension to this thought, I feel that accepting one’s inability to time the markets can eventually help amass quite a lot of money in markets.

I keep looking for data which proves the futility of market timing, atleast for average investors. This post evaluates data set for last few decades to see whether it makes sense to try to time the markets or not.

Now someone has rightly said:

“The market timer’s Hall of Fame is an empty room.”

Even Peter Lynch, one of the greatest investors of his generation, who also popularized the concept of PEG Ratio once remarked:

 “I can’t recall ever once having seen the name a market timer on Forbes’ Annual List of Richest People.”

Now to evaluate the usefulness (or uselessness) of market timing, lets pick 3 long term investors named A, B and C.

Investor Types

All three investors invest Rs 5,000 every month. Only difference is the timing of their investments.

Investor A invests on Monthly Highs (Perfect Mistiming)
Investor B invests on Monthly Lows (Perfect Timing)
Investor C invests on any one of the trading days of the month (Average Timing)
Now performance of these three investors has been evaluated over 5 different time periods (with amounts invested in brackets):

Starting 1990 – 24 Years Till Now (Rs 14.8 Lacs)
Starting 1995 – 19 Years Till Now (Rs 11.8 Lacs)
Starting 2000 – 14 Years till Now (Rs 8.8 Lacs)
Starting 2005 – 9 Years till Now (Rs 5.8 Lacs)
Starting 2010 – 4 Years Till Now (Rs 2.8 Lacs)

Results obtained by them over various time periods (upto 01 August 2014 – assuming complete month) are given in table below:
Market Timing Investor

Remember that Investor A is a Perfect Mis-timer and Investor B is a Perfect Timer. The calculations are based on actual Sensex figures between 1990 and 2014.

As you can see, the difference between a Perfect Timer (Investor B) and a Perfect Mis-timer (Investor A) is not as big as expected. For example, if both started out in 1995, their total investment of Rs 11.8 Lacs would have become Rs 54 Lacs and Rs 49 Lacs respectively.

A figure of Rs 49 Lacs is not bad for someone who got it wrong each month of the year since 1995!! He invested when index was at its highest point of the month. And he still fares decently when compared with Rs 54 Lacs achieved by a perfect timer (Investor B).

As an investor, I know I cannot time the markets perfectly, i.e. I am not Investor B. But since I invest regularly, I also know that by principle of averages, I cannot be Investor A, i.e. I cannot possibly pick the highest point every month to invest. This leaves me with just one option…that of being Investor C.

And I will be glad to be like Investor C.

Reason?

Without the effort (like that required by perfect timer), I am able to earn returns which are respectable when compared to those earned by a perfect timer. And this is clearly visible in table below:

Market Timing Outperformance

There is no big outperformance achieved by the investor who times the market perfectly (atleast monthly). As an investor who strongly believes in Power of Doing Nothing in Stock Markets, this result should be acceptable to all average investors.

And this clearly (if not convincingly) shows that if someone is ready to invest periodically with discipline, then timing the markets may not be essential at all. I agree that I have made few assumptions in these calculations. And that these may not be a technically correct ones when trying to prove the uselessness of market timing. But for average investors like us, this analysis is a clear indicator that if one is not interested questions like how and which stocks to pick, then trying to time the markets may not only be futile but also a worthless exercise. 

Just keep investing regularly in well diversified equity funds or index funds. You will be better off than 99% of the investors.

Caution: The data used in above tables is only for one index (Sensex) and hence representative of performance of a weighted-combination of only 30 companies which constitute the index. And since index constituents change over time (existing companies are regularly replaced by other ones), its possible that numbers might differ if any other index is chosen. Also, as a reader has rightly pointed out in comments below,  if the same logic is used for a combination of companies which are not part of the index, chances are that you might lose some money! But this also does not mean that if you follow passive investing, then you will not lose money. In markets, no matter how careful we are, we can never eliminate the risk of being wrong. 

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Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

23 comments

  1. Your recent articles are biased with passive investing style. Is there any reason?
    Is it possible to write post about “balaning quality against valuation”? Like nestle, hul, gsk are quoting alwaus high and performs better than index?

  2. One of the best articles (analysis) on market timing! But there may be a section of readers who can misunderstand it too. As of now, we have close to 5000 companies listed in India. What you considered is SENSEX i.e. an index of 30 companies which are selected by a panel of experts time to time and the list of those 30 companies also changes time to time. E.g. “Arvind”, “GSFC”, “DLF” companies are once listed but not currently. So if someone decides to invest only in SENSEX companies OR Index mutual fund, by default, they are investing in top 30 companies in the universe of stocks! This is called PASSIVE INVESTING as rightly pointed by the below reader. Most of the mutual funds portfolio, FIIs invest in these SENSEX companies. So, over a period of time, there is a high chance that the investors make good profits. So, timing may not be really required (as you already proved) in this type of Passive Investing. So this article should be considered only for Passive Investing. If your readers applies the same logic to non-indexed companies then there is a high chance that they lose money! To remind, Reliance Power, DLF during IPOs, Infosys in IT bull phase are still nursing wounds and are not recovered. I advise to put a clear disclaimer.

  3. Though I am personally biased towards passive investing, there is no particular reason for recent articles being more biased towards passive investing.

    But since markets have run up a bit in recent times, I would say that I am more fearful than normal and hence such themes occupy my mind while writing.

    Will try to write on the idea proposed by you.

    Thanks

  4. Would be interesting to see how the numbers change if you take yearly numbers instead of monthly (Say lumpsum 60k a year)

  5. Hi Dev Ashish,
    This is great analysis and provides insights on whether timing is important for generating high returns. Good work.
    If you give me the permission I would like to post this article on my blog http://www.elegantinvestor.in so that I can share the findings and insights with my readers and followers.
    Sridhar

  6. This is really a very good blogging site which your running. Many people really have a hard time figuring out investments and its meaning. The example given above is good.

    We encourage you to take your knowledge upto second level by sharing it on our platform

    http://www.rojjgar.com which allows skillful people like you to share their skills with other people who are looking for a particular skills or even can consultant people on topic for some money.

  7. This is a beautiful analysis, such a simple thought, and so enlightening (of course it would have taken lot of time to do this) so thanks a lot for sharing this….this has really put things in perspective as far as “investing” is concerned. In a way, this is proof of the fact that investing will work, no matter when you do it…

  8. Hi Dev,

    I never invest and/or will invest in Index Funds (in an Emerging Market like India). Index fund may work better in developed countries. In countries like india, active funds are likely to outperform index funds.

    Please refer to this link http://www.safalniveshak.com/do-not-invest-in-index-funds/ on Safal Nivehsak site why I dont invest in Index Funds written by Vishal.

    In the comments section you can see my comments wherein some data posted in July 2012 and once rechecked in Jan 2015, which clearly shows that atleast in Indian Context good MF will outperfom Index Funds.

    Should really do one detailed analysis and a post on this subject again.

  9. Nice number-based take on how market timing will give only a slight edge if you have all information possible (only happens in a utopian world or maybe insider trading). Market timing is akin to gambling and passive investing surely works better which also shows in the success behind SIPs and SEPs.

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