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Over the years I've written rather extensively on this subject and have
reviewed innumerable articles with these types of statistics. Every one
of them is bogus. For example, I talked to the U of M (my alma mater)
professor who did this study years ago and he was appalled it was being
used this way by the mutual fund industry. Omitted were the rest of the
findings which showed that missing the worst days yields a return
greater than a buy and hold. And better still, so did a portfolio that
missed both the worst days and the best days! In other words the
results could more truthfully be used to support the finding that its
worth the effort to try to miss the worst days even if you also missed
the best days. Any "missing the best" study like this that omits the
additional results in inherently flawed and probably deliberately
misleading.
In one research project I took the S&P and the Dow back to inception on
both a daily and weekly basis. In every case no matter how many days or
weeks you picked as the ones to miss from the best days, missing both
the best and worst ALWAYS beats the buy and hold.
Of course the whole study is ridiculous in that it assumes that
someone, without timing ability [which of course doesn't exist :-)],
could move an account out of the market on only the "best days". If you
can identify the best days in advance who needs buy and hold? You know
all their really saying when they quote these studies the way they do is
that "if you miss the best days your returns go down"! Duh? Tell me,
how can anything else happen?
Another study I did for the Journal of Investing (Summer 1997)
demonstrated that market timing does not have to be as accurate as
people assume in order to be successful. If one looks at the Dow from
1885 to 1994, a timer who bought 20% above every bottom and exited 20%
below every top, still beat the buy and hold investors returns over the
100 year plus period, and he did so with significantly less risk. The
same holds true whether you miss 10% or 15% as well.
Finally, there has only been one study of actual market timing firm
returns, and I authored it with two colleagues in 1992 (See Journal of
Portfolio management, Summer of 1992). We found that for the five year
period 1985-1990, the average market timing firm, matched the S&P 500
when their signals were used to time the S&P 500 (rather than the more
volatile funds they normally choose), not spectacular, BUT they did so
with 57% lower beta and 40% lower standard deviation and an annual alpha
of almost 5%! If you believe in modern portfolio statistical analysis
of risk you have to conclude that market timing works in the real
world. (See also studies on www.saafti.com click on "Background").
Jerry Wagner
Flexible Plan Investments, Ltd.
www.flexibleplan.com
> This will make you think when trying to time the market with a mutual
> fund.
>
> Robert
>
>
> "A University of Michigan study found that an investor trying to time
> the market between 1963 and 1993 who happened to miss the best 90
> days, or a little more than 1% of trading days, would miss out on 95%
> of the gains". Financial reporter Mary Rowland
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