Recently, I came across a fascinating write-up by Peter Lynch, a legend in the world of investing. He shares backtesting results on perfect market timing, and I was shocked by the results.
Let me pull up the quotes from his Worth magazine write-up in 1997:
“I’ve gone through this before, but let me give you another example based on actual stock-market performance from 1965 through 1995, a period with good years and bad. Imagine three investors, each of whom puts $1,000 into stocks annually over these three decades.
Investor 1, who is very unlucky, somehow manages to buy stocks on the most expensive day of each year. Investor 2, who is very lucky, buys stocks on the cheapest day of each year. Investor 3 has a system: She always buys her stocks on January 1, no matter what.
You’d think that Investor 2, having an uncanny knack for timing the market, would end up much richer than Investor 1, the unluckiest person on Wall Street, and would also outperform Investor 3.
But over 30 years, the returns are surprisingly similar. Investor 1 makes 10.6% annually; Investor 2, 11.7%; and Investor 3, 11%. Even I am amazed that perfect timing year after year is worth only 1.1% more than horrible timing year after year.”
This backtesting over three decades shows that the prize you get for perfect market timing is only 1.1% annualized.
Fast forward to today, and you might think things have changed.
But a replication of this study by Running Point Capital, covering 1994 to 2020, echoes similar findings: perfect timing offers a mere 1.5% annualized advantage.
Perhaps you’re thinking, “Hey! But, 1%+ compounded over decades could make a significant difference.”
In a study done by Schwab Center for Financial Research between 2003 to 2022, the difference between “Perfect timing” and “Worst possible timing” is $25,752, or 18.7% worse off in absolute terms.
In the perfect timing scenario, the investor annually invests $2,000 at the market’s lowest point. In contrast, the worst timing involves investing at each peak.
But let’s be honest, is there anyone in the world who can time the market perfectly for two decades?
And here’s a startling revelation: missing just the top 10 trading days in this period can slash your returns by more than half.
According to Visual Capitalist, a $10,000 investment would grow to $64,844 over 20 years.
Miss the ten best days, and you’re left with just $29,708 – a staggering 54.2% decrease than if you just simply remain invested.
The cost of missing out just the top 10 trading days in two decades significantly outweighs the benefit of timing the market perfectly.
Furthermore, staying invested is a choice and is within our control. Timing the market perfectly? Not so much.
Considering the odds and the prize for timing the market being just ~1% annualized, I would say you are better off staying invested rather than trying to time the market.
In a perfect world, we would all like to buy at the bottom and sell at the top.
But, as we don’t have a crystal ball, our focus should be on a repeatable process and minimizing downside risks.
The key?
Resist the lure of market timing and stay invested.
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See you soon,
Thomas