Hindsight Investing

Clay Wood |

In a perfect investing world, you would be able to see market bottoms coming and be prepared to buy at that exact moment for ultimate investment gain, right? Self-investors and professionals sometimes have an idea that holding cash and waiting for the market to pull back is a better strategy than buying as you have the ability or “Dollar-Cost-Averaging.” What if you could go back in time and only invest at those market bottoms? You might be surprised by the results.

Nick Maggiulli, a data scientist, decided to test how much better off your portfolio would be if you were able to time the market perfectly. He tested what would happen if you invested only at the market bottoms from 1970 – 2019. He used $1 per day, if the market did not reach a bottom the model would put that money in cash and wait until the next bottom. The comparing model used the same $1 per day and bought the market, in this case the Dow Jones Index.

Magguilli found that if you had the information to time the market perfectly you would outperform Dollar-Cost-Averaging. This was expected, but what is surprising is how little it outperformed. The market-timing model only averaged 0.4% better per year from 1970 – 2019.

For me, there are a couple of takeaways from this experiment. You don’t need to know what is coming to get a solid return. There is no reason to stress about getting in at the right time when in the long-term your results won’t be much better than if you executed perfectly. By simply buying as you go an investor can get a similar return to perfectly timing their investments. It is also a lot less stressful.

-Clay Wood-

-Some of the material above was provided by https://ofdollarsanddata.com/why-market-timing-can-be-so-appealing/-