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Stock Selling Strategies
The Folly of Market Timing
by Marco den Ouden

In 1997, Templeton Funds distributed a fascinating brochure demonstrating the folly of market timing. It displayed two charts of investments in the Templeton Growth Fund from 1972 to 1996. Each chart showed the cumulative total of money invested and return generated if one had invested $5000 a year for that 25 year period.

Where the charts differed, however, was in the timing of the investments each year. One chart assumed the worst possible timing - when the Dow Jones Industrial Average was at its peak for the year. The second chart assumed the best possible timing - when the DJIA was at its lowest point for the year. The charts show the dates of the investments and the cumulative value of the investments at the end of each year.

What do you suppose the results were after 25 years? How much better did the accurate market timer do than the rotten market timer? Remember that the 25 year period included the bear years of 1973 and 1974. Do you think the accurate timer did twice as well as the bad timer? Three times as well? What about the average annual compound rate of return for each portfolio? Was the deviation greater than 5%, between 2% and 5% or less than 2%?

The answers will astound you. The cumulative value of the good timer's portfolio after 25 years was a staggering $1,719,702. And what about the poor slob who had the rotten luck to mistime each annual investment? Well, he wasn't such a poor slob after all. His portfolio accumulated to a staggering $1,427,872! Yes, even the worst possible performance of people who consistently added $5000 a year to their Templeton investment ended up with almost a million and a half dollars. Fully 83% as much as the person who had horseshoes up his butt. (And nobody is that good a market timer!)

Annual average compound rate of return? The accurate timer had an average annual return of 18%. The schmuck had 16.9%! You read that right. The deviation between absolutely accurate timing and absolutely atrocious timing was a measly 1.1%. And if someone were to follow the practice of dollar cost averaging, he would be somewhere between the two levels of performance with a likely deviation of less than half a percent.

Great Timer's Portfolio Lousy Timer's Portfolio
Value of Account Rate of Return Value of Account Rate of Return
$1,719,702 18.0% $1,427,872 16.9%

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