The principle of stock investment is very simple: buy low and sell high. The problem is that our investment universe is so complex, it is almost impossible to most folks to attemp to predict the future and time the market. According to the study [1] by Brinson, Singer, and Beebower, investment portfolio performance is determined by
- Asset Allocation - 91.5%
- Individual Investment Selection - 4.6%
- Other - 2.1%
- Market Timing - 1.8%
Asset allocation is much more important than market timing in achieving investment performance.
Historical data
Many analysis on stock market using historical data show that just missing a few of the best return days would make your performance horrible.
S&P 500 Index: December 31, 1994 - December 31, 2004 [2]
| Investment Period |
Average Annual Return |
Growth of $10,000 |
| Fully invested |
12.07% |
$31,260 |
| Missed the 10 best days |
6.89% |
$19,476 |
| Missed the 20 best days |
2.89% |
$13,414 |
| Missed the 30 best days |
-0.39% |
$9,621 |
| Missed the 40 best days |
-3.19% |
$7,233 |
| Missed the 60 best days |
-7.90% |
$4,390 |
S&P 500 Index: December 31, 1987 - December 31, 2007 [3]
| Investment Period |
Average Annual Return |
Growth of $10,000 |
| Fully invested |
11.82% |
$93,339 |
| Missed the 10 best days |
9.17% |
$57,778 |
| Missed the 20 best days |
7.10% |
$39,398 |
| Missed the 30 best days |
5.26% |
$27,886 |
Time in the market, not timing the market
The key is not timing the market, but the amount of time you are in the market. Study by William Sharpe found that market timers must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors [4]. The lessons are:
- make sure are appropriately diversified with a strategy that makes long term sense for your needs.
- stick with your plan since the markets have always seen volatility on the up side and on the down side.
- while past data do not guarantee future performance, history has shown that those investors who stick with their well-diversified investment plans often end up with better returns than those investors who try to time the market.
Sources:
[1] Determinants of Portfolio Performance II: An Updat, Brinson, Singer and Beebower, 1996.
[2] FactSet Research Systems Inc.
[3] Interactive Data Systems (IDS).
[4] Profit From Market Timing, Rich Duprey, January 23, 2007
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