Market Timing
We recently came across an analysis performed by economics author Robert Goodman regarding individuals attempting to time the market.
Suppose those three investors had each put $5,000 into the stock market every year since 1960. Investor A is very lucky and manages to pick the best day of the year to buy. Investor B does not try to time the market and invests on July 1 of each year. Investor C is unlucky and invests on the worst day of each year.
Note that the annualized returns are surprisingly similar. Also, note that the lucky investor accumulated $140,000 more than the investor that didn't time the market, while the unlucky investor lagged the consistent investor by $280,000. Worse than being unlucky, the individual who invested $5,000 solely in Treasury bills each year over the same period ended up with only $569,179. The key to successful investing is consistency over long periods.
Type of Investor | Total Accumulation | Annualized Rate of Return |
A Lucky |
$2,615,866 |
12.8% |
B Consistent |
$2,476,729 |
12.6% |
C Unlucky |
$2,197,167 |
12.1% |