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An Elusive Dream

The stock market goes up and down, but over the long-term, the trend is strongly upward. Looking at the market’s rise from this perspective masks an ugly reality.

Growth of the U.S. Stock Market

1926-2019


U.S. Stock Market as represented by the Ibbotson SBBI U.S. Large Stock index. Growth is shown on a logarithmic scale to more clearly highlight growth through history. Data Source: Morningstar.

A closer view shows that the market line often resembles a jagged saw blade that can cut the heart out of even the most seasoned investor.

Growth of the U.S. Stock Market

1998-2018


Source: Compustat, FactSet, Federal Reserve, Standard & Poor’s, J.P. Morgan Asset Management.
Dividend yield is calculated as consensus estimates of dividends for the next 12 months, divided by most recent price, as provided by Compustat. Forward price to earnings ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns.

Everyone dreams of an investment process that has you in the market when it’s going up and gets you out when it’s going down. But, alas, such an investment process is just that – a dream.

The problem isn’t that market timing never works. The problem is that it works just enough to give you hope, but not enough to improve performance over the long-term.

There are no academic papers or rigorous examinations of market timing calls that support the consistent, long-term success of that approach to investing. There are, however, plenty that point out its shortcomings and document the hurdles to its success.

The hard facts

A 2016 article by Wim Antoons, Market Timing: Opportunities and Risk, surveyed some of this research and offered additional evidence against the efficacy of market timing. Antoons reviewed research done by the CXO Advisory Group, which collected predictions by 68 market timing gurus between 1999 and 2012. The data showed that 42 of the 68 gurus (61.8%) were accurate less than 50% of the time.

Antoon studied the CXO predictions for the period 2005 through 2012 – a total of 6,582 forecasts – and found that “after transaction costs, no single market timer was able to make money.” These results led Antoon to conclude: “There are two kinds of investors: those who don’t know where the market is going and those who don’t know what they don’t know.”

Other studies cited in Antoon’s article support this conclusion.