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Market Timing is for Losers – A Case Study

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Market Timing is for losers - MakeLivingGoodIn this post, we will unearth the truth behind stock market timing for investments with help of 3 hypothetical portfolios and investment strategies of our assumed characters; Albert, Berry and Christina. In our first scenario, we will analyze the investment philosophy of Mr. Albert who can accurately time a market’s downturn and has only invested his saved money at market bottoms throughout his investing life. All our characters have same time span for investment (32 years) and same amount of extra cash ($1500) a month to invest in whatever they like. Surprisingly they all have chosen same mutual fund from Vanguard (more details below).

So, lets start with our first scenario, and just to keep this post short, I will uncover other 2 scenarios as we proceed through and not give intro at about those scenarios at this moment.

On a side note, I have written more about how knowledge is power in investing world which covers in depth analysis of Vanguard active and passive funds.

Market Timing Scenario 1: Investing at Market Bottom

Mr. Albert is a smart professional who spends most of his day watching market movements and predicting where the trend is going. Surprisingly, Mr. Albert has perfected the art and can very precisely tell if market has bottomed at current levels or not.

Another important characteristic of Mr. Albert is that, he is not a fan of regular systematic investments but rather believes in one time bulk investment at favorable price point only. That’s why he patiently saves as much as he can every month and put it in his cash account & wait for right moment to invest saved cash.

Mr. Albert manages to set aside around $1500 a month for future investments and as I mentioned before, he is very patient and has always made investments at rock bottom prices only ( thanks to his ‘super predictive powers’ ).

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Considering he saves $1500 a month on an average, in a year he will have $18,000 ($1500 x 12) to be invested when time comes. If he is not convinced that market is ready for his investment, he will continue accumulating cash every month into his cash account and when right time comes, he will use every bit of his cash for investing.

To keep the analysis simple, I will use Vanguard 500 Index Fund Investor Shares (VFINX) as it closely tracks S&P 500 and have returns nearly matching that of overall S&P 500 index.

S&P 500 is an American Stock market index comprising of 500 largest US companies.

P.S: Any reference to VFINX in this post, is just for experimental analysis purposes and shouldn’t be considered as an advice to invest into. Kindly do your own due diligence before investing your hard earned money into any investment fund. This post is just to highlight common investment misconceptions through experimental analysis.

I have done some homework here and listed down the days when market had sharp corrections since 1980s (VFINX data is available since 1980 on Yahoo Finance which I have used for this analysis.). Below are the days with sharp correction in VFINX price, a perfect opportunity for Mr. Albert to invest in bulk.

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When VFINX is bought at market bottom Analysis - MakeLivingGood

As seen, on 30th Nov’1987 VFINX was at $22.59 a unit (if unfamiliar with what a unit means in index funds, you can think about it as a single stock for this analysis). Mr. Albert had made his first investment of $18,000 at this price point and bought 797 units into his portfolio.

The next correction was on 8th Oct’ 1990, 34 months later. During this time, Mr. Albert was saving $1500 a month for 34 months, which produces a total in hand cash of about $51,000, ready to be invested again in VFINX at a price point of $38.78/unit. At this price point, he bought 1,315 units into his existing portfolio of 797 units from previous purchase. Thus total number of units in his portfolio on 8th Oct’1990 was 2,185.87.

Mr. Albert continued doing it until recent times when he made his most recent lump sum(aka bulk) investment of $51,000 on 17th Dec’2018 when VFINX was at $223.01/unit price point and shelved about 229 units into his portfolio.

Ever since Mr. Albert made his first investment on 30th Nov’1987, he was also getting quarterly dividends which he chose to be re-invested into his portfolio. So, if $1 of dividend is distributed by Vanguard then Mr. Albert would have received $1 x number of units in his account on the day. The total amount received was used automatically to buy more units on the day and added into his account, make sense? In above table, I have shown the dividend units on the day when actual investment was made, just to keep the table short otherwise it would have 400 rows.

As of today (10th Aug’2019), he has invested a total amount of $574,500 into 11,630 units of VFINX (including 3758 units earned just from re-investment of dividend distributed by fund over the time period) in 32 years.

Today’s closing price of VFINX is $271.54 which means Mr. Albert’s portfolio values over $3,158,008 at today’s price, a gain of 550% in over 32 years. Not bad !!!

Just hold onto your thoughts until we look at all 3 scenarios. So, our next scenario is about Mr. Berry. Let’s look into that now.

Market Timing Scenario 2: Investing at Market Peaks

Meet Mr. Berry who is exactly opposite of Mr. Albert as far as investment luck is considered. No matter how hard, Mr. Berry tries but he always end up investing at market peaks. But he has one similarity with Mr. Albert, which is that Mr. Berry also saves regularly and manages to set aside $1500 a month into a checking account for future investment opportunities.

Without wasting any time, let us quickly jump into numbers here. As previously I have done some work here too and found peak prices of VFINX (comparing to S&P 500) since 1987 which are given below in the table with VFINX per unit price on that day.

After doing similar calculations as above, we find that Mr. Berry were shelving fewer number of VFINX units for same amount of money as compared to Mr. Albert. This makes total sense too, as Mr. Berry is buying at market peaks when price per unit is high, he will get fewer units in return. Below is summary of his portfolio as of today.

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When VFINX is bought at market Peak Analysis - MakeLivingGood

As seen above, market was at it’s peak on 17th Aug’ 1987 when Mr. Berry made his first VFINX purchase at $33.83 per unit and shelved about 532 units on the day.

Just like in previous scenario, Mr. Berry continued to make purchases at market peaks ( I suggest not to judge his timing yet. Lets wait for the results. I am sure you will be surprised!!! ) until very recent times. Over 32 years, he made a total investment of $574,500 (same as Mr. Albert) and holds 7,733 units in his portfolio (including 2,653 units earned from dividend re-investments over time).

At current VFINX unit price ($271.54), Mr. Berry’s net portfolio including dividends is $2,099,906, a gain of 366% in 32 years. This is quiet shocking to know that even though Mr. Berry was investing ONLY at market peaks throughout but still managed to turn his portfolio more than 3.5 times which is not bad at all.

Investments at peaks in stock market can still yield positive returns if position is held for long periods of time.

Now let us look at our final scenario which is very important for all common investors and I highly recommend you to not miss reading the conclusion in the end.

Scenario 3 : Investing Regularly

Meet Ms. Christina, who acknowledges that timing market is not her strength and she won’t be able to accurately time market peaks or bottoms. So, she decided to not spend her precious time on trying to time a market movements but rather stick to a disciplined approach of saving and investing regularly.

Her approach is to regularly save a fixed part of her earned income and invest it into some index fund (e.g VFINX) automatically every month. She had been saving $1500 a month ever since her first pay check and investing it into an index fund.

Ms Christina didn’t bother about if market is at it’s peak or at it’s bottom but rather she setup an automatic transfer of a fixed amount every month from her bank account to her investment account. So, even before she is able to touch first $1500 of her paycheck it’s already transferred into her investment account. I personally think if you seriously want to save a part of your paycheck, then setup an automatic transfer from your expense account into some sort of investment account as soon as your paycheck arrives.

Remember investment is all about adopting or ‘enforcing’ good habits

Now lets get back to our 3rd investment scenario. Unfortunately Christina started her first investment on one of the days (1st Aug 1987), when market was at it’s peak in the year. Will it impact her returns, let us see that now.

She started with $1500 invested in VFINX index fund on 1st of every month since 1st Aug’1987 until today (Aug’2019) and still going on. She also made a decision that any dividend distributed by the index fund, should again be re-invested into her account. She continued it for 32 years as done by Mr. Albert and Berry.

Since it will be a very long table to show here, I have only posted few of the dates, just to keep it simple. The summary portfolio section below covers overall investment highlights for her account. Pay special attention to total dividend earned in recent years. This is unmatched even by Albert who only invested at market bottoms.

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When VFINX is bought regularly over long time Analysis - MakeLivingGood

As indicated above, Christina invested a total of $577,500 in 32 years and accumulated a total of 12,409 units (including 4,587 units earned from dividend re-investment alone). At current market price of $271.54 per unit, her portfolio values about $3,369,573. a gain of 583%.

As seen above, Christina’s portfolio grew much more than other 2 scenarios. The important thing to note here is that she did it with minimal amount of time spent in making investment decisions. In fact she probably spent not more than 1-2 hours in setting up her investment account and instructing her bank to make regular monthly transfers from her paycheck to investment account automatically. Compare this with amount of time both Mr. Albert and Mr. Berry spent in monitoring the markets daily and predicting it’s moves.

Key Takeaways

So what have we learned from above analysis?

  • I used simple math to calculate the number of units allocated at certain price points & then arriving at portfolio valuation in each of the scenario. Vanguard and Yahoo Finance are showing even higher growth rate of 711% between Aug 1987 to July 2019. I believe they have different methods of accounting the returns. But nevertheless, our objective isn’t about finding accurate returns but to learn about different investment strategies.

Market Timing is for Losers by MakeLivingGood

  • Investing at market peaks doesn’t necessarily yield negative returns provided investor holds the investments over really long period (in this case over 3 decades).
  • Investing at market lows can surely yield good returns but no one can accurately predict the market movements in future. So, anyone trying to do it will eventually miss the opportunities and precious investment timeframe.
  • Disciplined regular investments proved to yield best returns with minimal amount of stress and work compared to cases where timing the market were key skills. Again, this plays well if someone does it over a long period of time. I highly recommend checking this post – Can We Really Make Money in Stock Market
  • Over a long period of time, Index funds yields match with overall market returns which is actually the average return. But many people do not invest in index fund just because it has average returns over time. But they do not know that 99% of investors (including mutual funds, hedge funds, direct equities etc) fail to beat average return of overall market over a long period of time.

I hope you enjoyed reading Market Timing is for Losers – A Case Study. It’s your time now to tell me how you feel about market timing and if you are currently doing or have done it in past too. Let us meet in comments below.

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Market Timing is for Losers – A Case Study

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