The Motley Fool Previous Page


The Buy and Hold Apocalypse - Market Timing Is Bunk

http://www.fool.com/school/buyandhold/buyandhold06.htm


Longtime skeptical readers will be wondering why I am focusing so much on how to measure market returns in making my case for why the "buy-and-hold approach" is far from dead. In my Technophrenia series, I wrote an article called "A Market of Stocks," arguing that the very concept of a "stock market" was an historical anachronism created by the tighter linkage between companies when the U.S. economy was less complex. One of the main reasons why people want to measure the performance of the "market" outside of its component stocks is to enable some form of market timing, a practice that has convincingly been debunked by most academic work in recent years.

Market timing is bunk? Yep. Consider, for instance, the returns on small company stocks between 1925 and 1992. If you had been invested in small company stocks over this period, your average annual return would have been 12.1%. If you sat out the single best month during that 67 year period, you would have only made 11.2% a year. If you missed out on the best five months, well, forget it... you would have only notched gains of 8.5%. Finally, if you had missed the best ten months -- something all sorts of market timers managed to do in 1995 -- you would have only retained 6.3% annual gains, almost half of what you could have made ha