Here is a chart of SPY’s annual high and low price for the past 10 years, courtesy of Yahoo:

Year High Low Difference
2007 157.52 136.75 15.19%
2008 146.53 74.34 97.11%
2009 111.74 67.10 66.53%
2010 126.20 101.13 24.79%
2011 137.18 107.43 27.69%
2012 148.11 126.43 17.15%
2013 184.69 144.73 27.61%
2014 212.97 173.71 22.60%
2015 213.78 182.40 17.20%
2016 212.52 181.02 17.40%

Every year the stock market rises and/or falls at least 15%, if not much more.  In a couple of those years the market dropped significantly, and in 2008, the market ended the year with a 37% loss.  In other years there were multiple rises and/or falls of at least 10-15%.  What makes market timing so tempting is that if you could just buy at the low and sell at the high, then your returns would be incredible. Thousands of people attempt to do just that, sometimes using well researched methods and other times using methods that look more like tarot cards.

Most market timing efforts are not worthwhile. The brilliant minds running mutual funds are not able to consistently do so. There are also sample size problems with any method that worked a few times in the past, as there is no assurance that the method will work the next time. Moreover, few people have the fortitude to stick with a method that is not working, even if the method is academically sound. Then there are the fees and taxes that can more than offset the gains from a timing strategy.

The end result is that any market timing strategy should be carefully scrutinized. If an adviser tries to pitch such a strategy, then consider if the adviser has anything to gain from the strategy and whether the research supporting the strategy is independent. Even then, if it is a short-term trading strategy, be extremely concerned, and regardless of the strategy, seek a second opinion before taking the risk.

-Richard

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