Stock Market Timing: Why the odds are strongly against it (and why investors should fear missing the upside, not avoiding the downside)

In an ideal world, one would be able to time the markets in order to exit before a given market downturn, wait for the bottom, and swiftly re-invest after the crash, resulting in substantial financial out-performance. However, no academic paper (or rigorous examination of guru records) supports long term success in terms of market timing. An excellent research paper from the Brandes Institute went into a deep statistical dive on why that is, and shows why the odds are so stacked against market timing.

The short summary is it’s far more important, historically and financially, to make sure you are invested during bull markets than it is to avoid the markets during a bear market. Historically, Bull markets outperform nearly 5x in average gains versus average bear market losses.

Yet ironically, most investors stress over bear markets, and the least of their concerns is missing a bull or rising market.

Mathematically and historically, missing a rising market will cost you a lot more overall than successfully avoiding a down market. The following stats from the paper will help drive the point home:

From Dec 1927– Dec 2015 (S&P500 or equivalent):

12 Bear markets (bear market = -20% or larger drawdown), 13 bull markets.

Average Bear Market loss: -35.75%

Average Bull Market gain: +179.8%

In effect, it’s historically 5x more important to be invested for the upside with the stock market index, than to avoid the downside with your investments.

That knowledge alone may help you be more successful longer term as it will make it far easier to avoid the temptation of pulling out of an index fund in order to try and avoid an expected decline, because the real fear should be missing out on the upside.

Now, that doesn’t mean that sitting through a 35% draw-down will be fun (and also emphasizes the need to be careful with margin), but at least knowing that you are playing the odds can help you hang tight. And these numbers don’t include 2016–2018 which had even further upside.

“…a market timing strategist has tremendous natural odds to overcome, and these odds increase geometrically with the length of time and the frequency of the…