A Market Timing Myth

Abstract

Several securities and plannig firms publish a demonstration of the dramatically reduced returms that an investor would see if the investor were out of the market for the 10, 20, 30, or 40 best days over a time period such as 5 to 10 years. They claim this is a demonstration of the pitfalls of market timing. As a counterexample, this article shows the dramatically enhanced returns if the investor is in cash for a similar number of the worst days. The probabilities of picking the best or worst days out of a larger number of days are shown to be minuscule. In fact, the probability of winning a lottery, or even several lotteries in a row, is better than the probability of replicating the investment results these firms are discussing.