6 ms·

The point of the trivia is arguing against trying to time the market. Lots of people predict crashes are coming, so shift money from equities to cash or bonds.

The point of the trivia is arguing against trying to time the market. Lots of people predict crashes are coming, so shift money from equities to cash or bonds. Unless you can time it perfectly (you can't), it is better to hold because you don't know when the best or worst days are.

mertd 5y ago
But the analysis assumes you timed the market "perfectly" and sat out only on the 10 best days.
tut-urut-utut 5y ago
I agree that timing the market usually doesn't work. But it doesn't work in both ways. You are equally likely to miss or hit both good and bad days, with the same or similar impact on total return.
- ceejayoz 5y ago
  The good and bad days are not equally likely to be equally good/bad, though. Long-term, the market tends to rise; the good days will outnumber the bad in either quantity or quality.
- gimmeThaBeet 5y ago
  The author's colleague had a blog post on the topic, reasoning that missing either the best or worst was not a particularly interesting "what-if" since the best and worst days are both associated with the same bouts of higher volatility. He used the 200 day moving average to try and model the effect of 'missing' both. It honestly didn't turn out so bad, but one takeaway is that backtesting (aside from not being a necessarily great projection) does not model personalities. https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/ https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
- charwalker 5y ago
  If one is equally likely to miss both good and bad days, but overall the market is up 10%+ in a year (repeated over decades), then money left in the market will double every 7 years or so (Rule of 72 [1]). In that way it is almost always preferable to invest and hold in index funds. The S&P 500 has returned about 13.6% return per year from 2010-2020 [2], or doubling your money about every 5.5 years. If that rate continues or increases then of course it makes no sense to try and time the good or bad days. Of course, some will argue that a pure index fund market won't be priced correctly as it is active/day traders who continually buy and sell to set a proper market rate. If everyone buys and holds like Bitcoin then there is no true reflection of the companies value in the stock. Those that would go under otherwise may be buoyed or bought out just for their stock value. There are many opinion articles out there on the topic, but so far it hasn't been observed at scale (I think). [1] https://en.wikipedia.org/wiki/Rule_of_72 https://en.wikipedia.org/wiki/Rule_of_72 [2] https://www.businessinsider.com/personal-finance/average-stock-market-return https://www.businessinsider.com/personal-finance/average-sto...
- z2 5y ago
  This is a guess based on anecdotes on recent volatile periods, the general scenario could be this: 1. Market falls sharply. 2. General public panic and sell, while market timers double down. 3. Market falls further, market timers panic and sell. 4. Markets rebound sharply, with the above-mentioned people missing those good days. The key assumption is that at least some really good days usually follow really bad days.
  - Lionga 5y ago
    50% of the time it works all the time
baby 5y ago
I can attest. Beginning of covid: stocks are crashing, going down 10% every day, I read the paper from that uni in London that says we are going to be alternating light and heavy lockdowns for the next 12-18months. More than a year of lockdown? How can the economy survive this? I’m like: sell, sell, sell. Right when I sold the market went up like crazy and has more than recovered now.
- nightski 5y ago
  Right and you probably do not follow the market very closely. Which is fine, that is most people. If you start watching it closely though (and I mean over several months to years) there are many patterns that emerge. I knew a lot of people that bought the dip last year. They weren't worried about how long it would take the economy to recover, or if it would go down further because they knew things were VERY cheap and it would eventually come up unless there was a global economic collapse at which point it wouldn't matter anyways. Most I knew dollar cost averaged down. It paid off very well.
  - kesselvon 5y ago
    That assumes you have the time to make up for bad market years like that. If you're retired and you see the market tank like that, its hard to fight the urge to not panic sell
  - cableshaft 5y ago
    Usually I'd say your correct. Like if I hadn't been laid off and decided to go back to school I would have had no problem buying the dip during the recession in 2008. But last year could have gone very differently. The US (and the world in general) was tested in all sorts of ways last year in ways the people and the government are really not used to, and things probably should have gone a lot worse than it ended up going, but somehow the country made it through intact, although unfortunately with a lot of dead people and failed businesses. It went well (for the stock market, at least) this time. Next time, maybe not, especially with climate change continuously getting worse with almost nothing being done about it. For myself, I didn't bother selling any of my 401k (and kept putting money into it), so I didn't lose anything, but I did start putting spare money into other assets.
altvali 5y ago
The part about timing it perfectly is not true. You can time it, for example predict that the market will crash, shift your money to bonds now, the market goes up for another year and then dips below the level you exited at. At that point, you can shift back and you'd have made less money than someone who timed it perfectly but more money than someone who stayed.
splithalf 5y ago
It’s such a fundamental contradiction you see it everywhere. The quote “buy low, sell high” says we should time the market. Even the classic “percentage of bonds to stocks should be your age” requires us to time the market. And if you just buy stock when you happen to have spare cash, that too is “timing the market.”
- sokoloff 5y ago
  I would argue that the percentage of bonds should be your age is not timing the market in any meaningful sense of that phrase. (I also think that's too conservative an asset-allocation, but in any case "make a periodic rebalancing trade according to this preset formula" is the opposite of "time the market".)
  - splithalf 5y ago
    I would argue that the distinction between periodic rebalancing and timing the market is subjective. Even if you aren’t trying to rebalance based on market conditions, ie selling at a high, the downsides of market timing are still there just the same. Just because you don’t care about the timing of your trades doesn’t mean the timing doesn’t matter.
    - sokoloff 5y ago
      By that logic, the initial investment timing matters as well, which is technically true of course but practically not particularly useful. If you want exposure to equities, you have to buy equities at some time.

mertd 5y ago

But the analysis assumes you timed the market "perfectly" and sat out only on the 10 best days.

tut-urut-utut 5y ago

I agree that timing the market usually doesn't work. But it doesn't work in both ways. You are equally likely to miss or hit both good and bad days, with the same or similar impact on total return.

ceejayoz 5y ago
The good and bad days are not equally likely to be equally good/bad, though. Long-term, the market tends to rise; the good days will outnumber the bad in either quantity or quality.
gimmeThaBeet 5y ago
The author's colleague had a blog post on the topic, reasoning that missing either the best or worst was not a particularly interesting "what-if" since the best and worst days are both associated with the same bouts of higher volatility. He used the 200 day moving average to try and model the effect of 'missing' both. It honestly didn't turn out so bad, but one takeaway is that backtesting (aside from not being a necessarily great projection) does not model personalities. https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-days-miss-the-best-days/ https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
charwalker 5y ago
If one is equally likely to miss both good and bad days, but overall the market is up 10%+ in a year (repeated over decades), then money left in the market will double every 7 years or so (Rule of 72 [1]). In that way it is almost always preferable to invest and hold in index funds. The S&P 500 has returned about 13.6% return per year from 2010-2020 [2], or doubling your money about every 5.5 years. If that rate continues or increases then of course it makes no sense to try and time the good or bad days. Of course, some will argue that a pure index fund market won't be priced correctly as it is active/day traders who continually buy and sell to set a proper market rate. If everyone buys and holds like Bitcoin then there is no true reflection of the companies value in the stock. Those that would go under otherwise may be buoyed or bought out just for their stock value. There are many opinion articles out there on the topic, but so far it hasn't been observed at scale (I think). [1] https://en.wikipedia.org/wiki/Rule_of_72 https://en.wikipedia.org/wiki/Rule_of_72 [2] https://www.businessinsider.com/personal-finance/average-stock-market-return https://www.businessinsider.com/personal-finance/average-sto...
z2 5y ago
This is a guess based on anecdotes on recent volatile periods, the general scenario could be this: 1. Market falls sharply. 2. General public panic and sell, while market timers double down. 3. Market falls further, market timers panic and sell. 4. Markets rebound sharply, with the above-mentioned people missing those good days. The key assumption is that at least some really good days usually follow really bad days.
- Lionga 5y ago
  50% of the time it works all the time

baby 5y ago

I can attest. Beginning of covid: stocks are crashing, going down 10% every day, I read the paper from that uni in London that says we are going to be alternating light and heavy lockdowns for the next 12-18months. More than a year of lockdown? How can the economy survive this? I’m like: sell, sell, sell. Right when I sold the market went up like crazy and has more than recovered now.

nightski 5y ago
Right and you probably do not follow the market very closely. Which is fine, that is most people. If you start watching it closely though (and I mean over several months to years) there are many patterns that emerge. I knew a lot of people that bought the dip last year. They weren't worried about how long it would take the economy to recover, or if it would go down further because they knew things were VERY cheap and it would eventually come up unless there was a global economic collapse at which point it wouldn't matter anyways. Most I knew dollar cost averaged down. It paid off very well.
- kesselvon 5y ago
  That assumes you have the time to make up for bad market years like that. If you're retired and you see the market tank like that, its hard to fight the urge to not panic sell
- cableshaft 5y ago
  Usually I'd say your correct. Like if I hadn't been laid off and decided to go back to school I would have had no problem buying the dip during the recession in 2008. But last year could have gone very differently. The US (and the world in general) was tested in all sorts of ways last year in ways the people and the government are really not used to, and things probably should have gone a lot worse than it ended up going, but somehow the country made it through intact, although unfortunately with a lot of dead people and failed businesses. It went well (for the stock market, at least) this time. Next time, maybe not, especially with climate change continuously getting worse with almost nothing being done about it. For myself, I didn't bother selling any of my 401k (and kept putting money into it), so I didn't lose anything, but I did start putting spare money into other assets.

altvali 5y ago

The part about timing it perfectly is not true. You can time it, for example predict that the market will crash, shift your money to bonds now, the market goes up for another year and then dips below the level you exited at. At that point, you can shift back and you'd have made less money than someone who timed it perfectly but more money than someone who stayed.

splithalf 5y ago

It’s such a fundamental contradiction you see it everywhere. The quote “buy low, sell high” says we should time the market. Even the classic “percentage of bonds to stocks should be your age” requires us to time the market. And if you just buy stock when you happen to have spare cash, that too is “timing the market.”

sokoloff 5y ago
I would argue that the percentage of bonds should be your age is not timing the market in any meaningful sense of that phrase. (I also think that's too conservative an asset-allocation, but in any case "make a periodic rebalancing trade according to this preset formula" is the opposite of "time the market".)
- splithalf 5y ago
  I would argue that the distinction between periodic rebalancing and timing the market is subjective. Even if you aren’t trying to rebalance based on market conditions, ie selling at a high, the downsides of market timing are still there just the same. Just because you don’t care about the timing of your trades doesn’t mean the timing doesn’t matter.
  - sokoloff 5y ago
    By that logic, the initial investment timing matters as well, which is technically true of course but practically not particularly useful. If you want exposure to equities, you have to buy equities at some time.