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 hold.

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!