Bull Run
Of course, there are times when it pays to be out of stocks. But such times are more infrequent than most investors realize. Gibson cites a study by Trinity Investment Management, which reviewed bull and bear markets over a 40-year period. The results included these findings:
1) Bull markets lasted nearly three times as long as bear markets — 41 months versus 14 months.
2) The typical bull market delivers a 105% gain, versus a 28% drop in the typical bear market.
3) Even during bear markets, stocks go up during three to four out of every 10 months.
The Trinity study is almost 13 years old but its conclusions would be even stronger today, as stocks have advanced steadily during most of the intervening period.
Timing the Market
To succeed as a market timer, you must not only miss bear markets — you must also be sure and get back into the stock market in time for the next sustained rise in share prices. But those rebounds often occur after sharp declines in stock prices — the very times when most timers are still scrambling to get out of stocks.
Also consider taxes and transaction costs. A study by the Hulbert Financial Digest looked at pre- and after-tax returns of the recommended strategies of 29 market timing newsletters and compared them to the returns of an index fund that invested in the S&P 500. On a pre-tax basis only four of the letters beat the index fund over five years. And after taxes were considered only one newsletter edged out a buy-and-hold strategy.
Tips for Remaining Calm
So what should you do if you're worried? Make sure your savings include three to six months of living expenses in cash investments so you can cope with unexpected expenses or a financial setback such as a job loss. Also consider shifting some money from more aggressive funds to more conservative funds. One conservative choice is Janus Balanced (800-525-8983; $2,500 minimum, no load). This fund mixes stocks with bonds and other fixed-income investments to reduce shareholder risk. The fund has been 45% less volatile than the typical domestic equity fund over the past five years, but has gained 18.5% annually.
The evidence is overwhelming that market timing — shifting money between stocks and other assets to try to ride bull markets and avoid bear market losses — simply doesn’t work. Consider the records of funds that pursue a timing strategy. The Flex-Fund Muirfield (800-325-3539; $2,500 minimum investment; no load) uses a market timing strategy to try and avoid bear market losses. But the fund’s performance has suffered. It’s posted a 10.4% annual return during the past five years, versus a 20.3% annual gain for the typical large growth fund.
“When you ask investors who have been successful over time, they’ll tell you that their record has nothing to do with market timing,” says Roger Gibson, a Pittsburgh money manager and author of Asset Allocation.
Such anecdotal evidence has been strongly supported by academic and other formal studies over the years. Those studies generally conclude that the odds are heavily against a market timing strategy; over the long run, you are more likely to make money by sticking with your stock holdings through thick and thin. Why? Because over periods of three to five years or longer, stocks are wonderful investments — far better than cash or anything else you can buy through a mutual fund. Thus, whenever you take money out of stocks you are probably going to pay a penalty in the form of lower long-term returns.
