The following is an excerpt from "A
Random Walk Down Wall Street" by Burton Malkiel:
The Verdict on Market Timing
[Many professional investors move money from cash to equities or to long-term bonds based on
their forecasts of fundamental economic conditions. Indeed, several institutional investors now
sell their services as "asset allocators" or "market timers". The words of John Bogle, chairman of
Vanguard Group of Investment Companies, are closest to my views on the subject of market
timing. Bogle said: "In 30 years in this business, I do not know anybody who has done it
successfully and consistently, nor anybody who knows anybody who has done it successfully
and consistently. Indeed, my impression is that trying to do market timing is likely, not only not
to add value to your investment program, but to be counterproductive."]
Malkiel goes on to provide supportive data of the best of the best professionals in their allocation
to cash in percentage terms of total assets and how in the past 30 years, every time the allocation
to cash was raised higher - it coincided with every market trough. These are the 'best of the
best' professional investors and they are selling at the lows of each cycle.
He goes on to say:
[And the facts suggest that successful market timing is extraordinarily difficult to achieve.
Remember, over the past forty-nine years, the market has risen in thirty-three years, been even
in three years, and declined in only thirteen. Thus, the odds of being successful when you are in
cash rather than stocks are almost three to one against you. An academic study by Professors
Richard Woodward and Jess Chua of the University of Calgary shows that holding on to your
stocks as long-term investments works better than market timing because your gains from being
in stocks during bull markets far outweigh the losses in bear markets. The professors conclude
that a market timer would have to make correct decisions 70 percent of the time to outperform a
buy-and-hold investor. I've never met anyone who can bat .700 in calling market turns.] |
