The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it [market timing] successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently. — John Bogle, Common Sense on Mutual Funds, Wiley (March 1998)
Q3 2023 hedge fund letters, conferences and more
According to the Oxford English Dictionary, the expression “a fool’s errand” is thought to have originated in the early 1500s. The first recorded use of the phrase is in the play Sir Thomas More by Anthony Munday, which was written in 1592. In the play, one of the characters says, “This is a fool’s errand: we are sent to seek a needle in a bottle of hay.” The expression is thought to have originated from the idea that a fool is unable to see the futility of their actions. A fool’s errand is therefore a task that is pointless and unlikely to succeed.
Trying to outperform the market by timing exits (just before the bear awakens from its hibernation) and entries (as the bull enters the arena) is a fool’s errand. For example, my first book, The Only Guide to a Winning Investment Strategy You’ll Ever Need, published in 1998, contains the following tale told by Peter Lynch in a September 1995 article for Worth titled “Fear of Crashing.” Lynch argued that the best way to cope with the fear of a market crash is to assume the worst and examine the results. He explained that if you had invested the same amount on January 1 of every year for 30 years starting in 1965, your return would have been 11% per annum. On the other hand, if you had been unlucky enough to have invested the same dollar amount on the day the S&P 500 Index hit its peak for the year, your return would have been 10.6%, a difference of less than one-half of 1 percentage point – not only is no one that unlucky, you could not do it if you tried. On the other hand, if you invested on the day the S&P 500 hit its low for the year, your return would have increased to 11.7%, again a difference of not much more than one-half of 1 percentage point.
Lynch’s point was that it is virtually impossible to time the market perfectly, and that trying to do so is not worth the risk.
In the article, “Does Market Timing Work?” the research team at Charles Schwab performed a similar analysis to that done by Lynch, adding a few other strategies and covering longer periods. They considered the performance of five hypothetical long-term investors following five different investment strategies. Each received $2,000 at the beginning of every year for the 20 years ending in 2022 and left the money in the stock market as represented by the S&P 500 Index:
- Peter Perfect invested $2,000 in the market every year at the lowest closing point.
- Ashley Action invested her $2,000 in the market on the first trading day of the year.
- Matthew Monthly dollar-cost averaged (DCA), investing his annual $2,000 allotment into 12 equal portions at the beginning of each month.
- Rosie Rotten invested her $2,000 each year at the market’s peak.
- Larry Linger, convinced that lower stock prices were always around the corner, stayed invested in Treasury bills for the entire 20 years.
Article by Larry Swedroe, Advisor Perspectives
