HOW MARKET TIMING WORKS!

The long and abnormal bull-market of the eighties and nineties fooled many investors into believing that long-term 'buy-and-hold' is the only way to invest and grow wealth. As the bear market unfolded it became obvious that was a mistake. Being a successful investor requires a lot of important traits, but being completely passive about one's investments is not one of them! As the following example shows, successful market-timing can achieve superior growth even when the secular market trend is flat or bearish. Please read the important note that follows the example below and see if a market-timing approach for some or all of your portfolio could help you achieve better investment results.

Hypothetical Index Fund Strategy Example

Imagine a scenario where two investors Mr. Active and Mr. Passive are following two completely different investment strategies and they both start out by investing $1,000 in a hypothetical market index at the beginning of Year 1 (represented by point A on the chart). Let's say Mr. Active is an active market-timer with great market insights and therefore his strategy is to buy near the exact bottom (shown by points C and E on the chart) and sell near the exact top (shown by points B, D and F on the chart), and he does this very successfully each year up to point G. On the other hand, Mr. Passive has fallen prey to Wall Street's dangerous message of "buy and hold for the long term" so he buys at point A and simply holds on through the wild 4 year roller-coaster ride up to point G.

Here's how their portfolios would have performed at the end of those 4 years:

Mr. Active's portfolio would grow to $ 1,640 (+64%)

Mr. Passive's portfolio would stay stagnant at $1,000 (+0.00%)

Clearly active market-timing would do better than passive buy-and-hold although the market made no net progress.

Now consider a third participant in this scenario. Mr. Aggressive not only possesses the exact same insights as Mr. Active, but also has the temperament and higher risk tolerance to be an aggressive investor. So he not only sells at the exact same points as Mr. Active (points B, D and F), but also sells short at those points and he covers those short sales at the same points where Mr. Active buys again (points C and E). He would do even better.

Mr. Aggressive's portfolio would grow to $ 2,501 (+150%) in what turned out to be a flat market!

Q. Why did the active market-timing strategies do better?
A. Because the active traders in our example successfully bought low and sold high many times during that 4 year period while the passive investor bought and sold only once and both his trades were at exactly the same price!

IMPORTANT NOTE
To make comparisons simpler we have assumed zero commissions, dividends and taxes in the example above. Including typical commissions, dividends and taxes would still show active market-timing to be the better strategy. Obviously nobody can claim to have market insights like Mr. Active or Mr. Aggressive. Anybody who claims the ability to accurately call every top and every bottom is probably a liar or a fraud. The point to be made from the above example is simply that successful market-timing can be highly lucrative and in a flat or bearish market some degree of success at market-timing can produce significantly better results even for 'long-term' investors.

After the great bull market of the nineties and the excesses that it has created, we believe the secular long-term trend for the U.S. stock and real estate markets is going to be either flat or bearish over the next decade or more. In those market conditions active market-timing will be an essential prerequisite for investors who want to achieve capital growth. If you agree that active market-timing can benefit your portfolio please click on the link below to get your FREE membership and also check out our Money Management section to see how you can benefit from our expertise. It could be your best investment decision yet!

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