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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