Buy and Hold versus Market Timing

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Market Timing versus Buy and Hold

Theory into Practice

Note: We've learned that the study discussed below may be an urban myth. A representative of the University of Michigan recently emailed us asking if we could please provide the source of the study, since as far as they knew it was never done at their school.

The rest of the story: The director of research at Townley Capital Management stumbled across the same anomaly not long ago and decided to commission Professor Nejat Seyhun of the University of Michigan (naturally!) to finally and officially conduct such a study. You can now view the results on the Townley site.

Of course, you'll want to note that the new study confirms the findings of the old: successful market-timing appears to require superhuman reflexes (and more than a little luck).

There are many ways of addressing the "buy and hold" versus "market timing" debate and no small amount of research that may be drawn upon when doing so. One of the most straightforward and compelling studies of this question, however, was carried out a few years ago at the University of Michigan. Researchers there examined the Bull Market in stocks that ran from August 12, 1982 (the low from the prior cycle) to August 25, 1987 (the peak). They calculated the return an investor would earn in the Standard and Poor's 500 Stock Index over the entire market cycle, as well as the return that would be realized if the best 10, 20, 30, and 40 trading days were subtracted from the total of 1,276 days. As the chart below illustrates, any would-be market timer had better be incredibly nimble!

Period of Investment	% of Time Invested	AverageAnnual Return
Full 1,276 Trading Days	100%	26.3%
minus the 10 Best Days	99%	18.3%
minus the 20 Best Days	98%	13.1%
minus the 30 Best Days	98%	8.5%
minus the 40 Best Days	97%	4.3%

Source: University of Michigan