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I'm sharing a "Market Timing Simulator"
that I built to compare the performance of a 'regular' investing strategy (investing whenever you have cash on hand) versus a 'market timing' investing strategy.
It's an interactive web tool which lets you input your savings amounts, specify a market timing strategy (e.g., only invest your cash in the market whenever the current price is down by 30% from the all-time high price), and choose a time period (anywhere from 1980 to present).
The tool then uses actual daily returns from the S&P 500 index to chart out the value of your portfolio over time, for two scenarios:
- Regular investing: a straightforward strategy of investing your money in the stock market as soon as you get it
- Market timing: keeping your savings in cash and only investing in the stock market when the price is "low enough" (threshold based on your assumption)
We often hear that time in the market beats timing the market
, but I was curious to explore the degree to which this is true, and also to find some exceptions to the rule.
Also, even after several years of being a DIY investor, I find myself unable to shake the urge to time the market. Case in point: now that the market has recovered more than half of the COVID-19 losses, I've been holding off from putting new savings to work (shame!).
Troy and Abed in the Market
To illustrate how the tool works, let's take the example of Troy and Abed. They're study group partners at a local college who've decided to invest their savings in the stock market.
Troy and Abed each have $6,000 to start with, and will save an additional $200 per month going forward.
However, they've chosen different investing strategies:
- Troy has a simple strategy -- whenever he has cash on hand, he invests it
- Abed uses a more sophisticated strategy. He keeps his money in a savings account earning 2% per year, while monitoring the price of the stock market each day. He only invests in the market when the current price is at least 20% lower than the all-time high price
They start investing on January 1st, 2010.
Using the actual performance data of the S&P 500 index from 2010 to today (a period of 10-ish years), how did they fare? [Visualized here]
- Troy ends up with a final portfolio value of $64,399 (an average annual return of 11.5%)
- Abed end up with $59,990 (an average annual return of 10.4%)
- In this case, Troy ends up with $4,409 more than Abed. Not to mention that Troy also saved the stress of tracking the daily fluctuations of the market and used the time to hone his paintball tactics...
Abed's strategy allows him to capitalize on stock market corrections / crashes. For example, during the mini market crash of December 2018 -- which saw the S&P 500 decline by 20.1% from its peak price -- Abed had nearly $21,000 of cash which he used to buy stocks 'on the cheap'.
Similarly, Abed invested over $4,000 when the markets tanked in March 2020 due to COVID-19.
On the other hand, Abed's strategy results in him keeping cash on the sidelines when the market is doing well. As the S&P 500 index rose steadily from 2012 to 2018 -- routinely setting new all-time high prices -- Abed funneled his monthly contributions into a savings account instead of putting it to work in the markets.
In comparison, Troy invested his $200 monthly contributions into the market like clockwork. He never made any big trades during market crashes, and never held off from investing when the market might have looked "too high".
All in all, Abed's market timing strategy underperformed
Troy's regular investing strategy.
Of course, the example above only the results for one specific time period, using one specific set of assumptions.
To add some more data points, the table below shows the final results for various 10-year cycles. In all cases, the assumptions are: initial contribution of $6,000, monthly contribution of $200, a threshold price decline of 20% in the market timing scenario, 2% interest on cash, and nil trading transaction fees.
|Time Period ||Final Value - Regular Investing ||Final Value - Market Timing ||Delta - $ ||Delta - % |
|1980 - 1989 ||$72,810 ||$68,791 ||$4,019 ||5.8% |
|1985 - 1994 ||$60,234 ||$53,581 ||$6,653 ||12.4% |
|1990 - 1999 ||$105,995 ||$33,834 ||$72,161 ||213.3% |
|1995 - 2004 ||$52,383 ||$35,513 ||$16,870 ||47.5% |
|2000 - 2009 ||$31,000 ||$33,576 ||-$2,576 ||-7.7% |
|2005 - 2014 ||$54,740 ||$53,639 ||$1,101 ||2.1% |
|2010 - May 2020 ||$64,399 ||$59,990 ||$4,409 ||7.3% |
|Mean ||$63,080 ||$48,418 ||$14,662 ||30.3% |
|Median ||$60,234 ||$53,581 ||$6,653 ||12.4% |
Generally, the regular investing strategy comes out on top. This is due to the fact that the stock market tends to go up over time, especially when longer time periods are considered.
All-Time High Metrics
The table below shows the distribution of the S&P 500's daily prices from 1980 to today, in terms of how close the prices were to the current all-time high price.
| ||% of Total Days |
|At the all-time high (ATH) price ||7.5% |
|Within 1% of the ATH ||19.7% |
|Within 3% of the ATH ||37.0% |
|Within 5% of the ATH ||47.0% |
|Within 10% of the ATH ||61.6% |
|Within 15% of the ATH ||70.5% |
|Within 20% of the ATH ||78.4% |
|Within 30% of the ATH ||92.4% |
|Within 40% of the ATH ||96.6% |
|Within 50% of the ATH ||99.8% |
|Within 60% of the ATH ||100.0% |
On 7.5% of days (roughly 1 in every 13 days), the market is at
the all-time high price.
And on nearly half of all days (47%), the market is within 5%
of the all-time high price!
The market being at (or near) the all-time high price shouldn't be anything to fear -- in fact, it's a regular occurrence.
When Timing Does the Trick
That's not to say that market timing can't yield big profits.
Let's assume that Abed started investing in 1997 with $6,000 initially, +$200 added per month, and a strategy of investing only when the market was down by 45%+
from the all-time high price. [Visualized here]
At the end of 2011 (a 15-year period), Abed would have a grand total of $73,587 in his portfolio. Meanwhile, Troy's regular investing strategy would have only yielded $59,050. In this case, Abed would have outperformed
Abed's strategy was so succesful because he correctly predicted that there would be severe market declines on the horizon. His strategy allowed him to capitalize on the bursting of the dot-com bubble (a decline of 49.1% from the peak) and the great financial crisis of 2008 (a decline of 56.6% from the peak).
When Timing Falls Face Flat
However, we can also cherry-pick an example on the other end of the spectrum.
Let's assume that Abed used the same strategy (only investing when the market is down by 45%), but starts in the year of 1980 (instead of 1997 as shown above). [Visualized here]
At the end of 1994 (a 15-year period), Abed would have a grand total of $49,960 in his portfolio. Meanwhile, Troy's regular investing strategy would have only yielded $124,211. In this case, Abed would have underperformed
In this case, the market never declined by more than 45% in this 15-year period. The highest decline was 33.5% from the peak during 1987's "Black Monday". As a result, Abed never invests in the market at all! His savings stay entirely in cash, earning 2% per year.
Meanwhile, Troy's money grew at an average of 11.7% per year. ¿Donde esta les market timing profits? For anyone interested, the code for this project can be found here: https://github.com/getToTheChopin/marketTiming. A bare bones excel version of this tool can also be found at the bottom of the main page linked up top.