"The Plain Truth About Market Timing " - Bill Lussenheide 

Many believe that the use of a timing trading strategy is futile or even a deterrent to a profitable portfolio. I tend to agree if you are talking about a non-defined strategy of just going by your moods or the stars or some other non mathematical approach. 

The cynics say that if timing took you out of the market during only the very best days or the very best months of some longer period, your performance would greatly underperform just buying and holding the overall market. At first glance this seems self evident. 

However, what is not fair about  these statements is the discounting of the idea of avoiding the WORST market days or months! You cannot just view the idea of missing out on the best days of the market, unless you offset this view by factoring in the results by missing out on the worst days or months of the market on an equal basis. 

 Missing the worst periods has profound impact on long-run compounding. The Plain Truth is that it is more important to avoid the worst days or months ,  than it is to participate in the best days or months! 

This all comes about because stock prices  go down faster than they go up. Wall Street and most people tend to overlook the value of minimizing losses, and that is exactly why the recent  Bear Market demolished more than 50% of many peoples' portfolios while  those who trusted in a systematic system such as is practiced by Lussenheide Capital Management Inc.  escaped the worst of the bear's rampage.

In a study commissioned by Towneley Capital Management Inc. and conducted by Professor H. Nejat Seyhun, of the University of Michigan, the following chart  shows returns when excluding both worse and best months (and combinations thereof) . The individual who missed both the best and the worst 48 months of the market in the 68 year period studied, would have actually made more than the Buy & Holder. In addition, (and perhaps this is the most important factor), he would have achieved this with much lower risk, with a reduction of Standard Deviation (a risk measurement) by more than 33% from 19.3 for buy & hold, to just 11.6 for the portfolio that missed both the 48 best and worst stock market months. 

A One Dollar investment in January 1926 to December 1993,  became $637.30 for the buy & holder, whereas the investor missing both the best and worst 48 months would have ended up with $1080.90 an increase of  69.6%! As good Investment Warriors always remember that the best offense is always to have the best defense when it comes to investments! 

Returns excluding extreme monthly observations
for period January 1926 to December 1993 (68 years)

Condition

Number of Months

Average
Annual Return on Index

Standard Deviation of Returns

Average Annual Return on T-Bills

Cumulative
Return on Index

All months 816 12.02% 19.30% 3.48% 637.3
Exclude best 1 month 
Exclude best 2 months
Exclude best 3 "
Exclude best 6 "
Exclude best 12 "
Exclude best 24 "
Exclude best 36"
Exclude best 48 "

815
814
813
810
804
792
780
768

11.41
10.84
10.31
9.36
8.07
5.97
4.31
2.86

18.90
18.37
17.96
17.50
17.09
16.58
16.28
16.08
3.48
3.49
3.49
3.49
3.51
3.49
3.50
3.51
460.6
337.2
253.1
144.7
65.0
16.9
5.3
1.6
Exclude worst 1 month
Exclude worst 2 months
Exclude worst 3 "
Exclude worst 6
Exclude worst 12
Exclude worst 24
Exclude worst 36 "
Exclude worst 48
815
814
813
810
804
792
780
768
12.51
12.92
13.30
14.40
15.99
18.69
20.96
23.00
19.05
18.83
18.62
18.08
17.51
16.77
16.27
15.91
3.48
3.49
3.49
3.49
3.51
3.50
3.52
3.51
898.0
1,176.1
1,516.1
3,052.1
7,850.1
34,233.9
106,522.9
270,592.8
Exclude best & worst 1
Exclude best & worst 2
Exclude best & worst 3
Exclude best & worst 6
Exclude best & worst 12
Exclude best & worst 24
Exclude best & worst 36
Exclude best & worst 48
814
812
810
804
792
768
744
720
11.90
11.72
11.58
11.69
11.92
12.32
12.73
13.10
18.51
17.78
17.13
16.04
14.93
13.39
12.37
11.60
3.49
3.49
3.50
3.51
3.55
3.51
3.54
3.55
649.2
622.7
603.0
696.0
810.3
958.1
1,051.6
1,080.9

The value-weighted index of NYSE, AMEX, and NASDAQ stocks is used to measure the market returns. All returns and standard deviations are annualized by compounding the arithmetic average of monthly returns.

Cumulative return measures the holding period dollar returns to $1 invested at the beginning of the period. Hence, the cumulative return of 637.3 means that $1 grows to $638.30 if invested continuously from January 1, 1926 to December 31, 1993.

"Permission to use this study was given by Towneley Capital Management, Inc.  For complete text of study see  http://www.towneley.com/star.pl5?page=study "

 

NOW MORE THAN EVER, REMEMBER AND COMMIT TO STRATEGY, PATIENCE, & DISCIPLINE!

 

Copyright 2003 Lussenheide Capital Management