Chart courtesy Investech Research
But before you complacently say “Yeah! You convinced me, Marco. I guess I don’t
need to read the rest of this website now.” Consider this rejoinder to the folks
who aver that stocks will always go up in the long run so it’s better to buy and
They’re fond of trotting out a variation of the statistic noted by Mark Hulbert
– namely that by trying to market time, investors miss out on the big gains.
They point out that from 1928 to 2000, for example, a buy and hold strategy
would have turned $10 into $17,020. But if market timing caused you to miss the
thirty best months in that 72 year period, your return would be just $240.
What they don’t point out, however, is that by missing the thirty worst
months, an investor would have turned $10 into $1,864,400. In other words, the
upside potential of missing crushing bear markets far outstrips the downside
potential of missing the best months.
This is graphically shown in the chart at left from Investech Research.
The point is this: While buy and hold has a very strong and respectable track
record, and while successful market timing can be difficult, the upside
potential of successfully missing major downturns is staggering. And as the bear
market of 2000-2003 has shown us, not missing those downturns can be very painful indeed!