Investing without Wall Street: The Five Essentials of Financial Freedom

CHAPTER 10

The Case for Market Timing

If you agree that the benefit of owning a diversified stock portfolio is the best way to grow your money in the long run, you have to choose between two basic strategies: buy-and-hold or market timing.

Because I think that stock markets are going to be volatile for the foreseeable future, I prefer the latter.

Buy and Hold—Not What It Used to Be

On December 31, 1999, the S&P 500 Index stood at 1,469.25. On December 31, 2009, 10 years later, it was 1,115.10. In other words, it was 24.1 percent lower. In between, the market was all over the place, but overall it was a decade from hell. This is not a great recommendation for buy-and-hold.

Of course, there was a great rebound in 2009 and 2010. But even with this comeback, at the end of 2010 the S&P 500 was still 211 points (14 percent) below its end of the century peak. The next table shows a shocking coincidence.

S&P 500

October 3, 2008	1099.23
October 3, 2011	1099.23

With stocks in a secular bear market, I believe market timing has an advantage over buy-and-hold. Buy-and-hold is far less effective in the up and down markets we are experiencing this decade, and which I believe will continue for quite some time.

How good an alternative is market timing? Well, one thing is certain: Short-term market timing is so difficult that for all practical purposes, it is not worth trying.

But what about long-term timing? Or what about just getting a sense of where the market is going, so you have some ...