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Why market timing doesn't work: S&P 500 is up 14% this year, but just 8 days explain the gains

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The cost of not being in the market on the most important days is devastating to a long-term portfolio.

Victor J. Blue | Bloomberg | Getty ImagesIf you want a simple indication of why market timing is not an effective investment strategy, take a look at the data on the S&P 500 year to date.

How to explain that the S&P is up 14% but the number of up days is about the same as the down days? Just saying "there's been a rally in big cap tech" does not quite do justice to what has been happening. The bad news: had you not been in the markets on those eight days, your returns would be considerably worse.Colas is illustrating a problem that has been known to stock researchers for decades: market timing — the idea that you can predict the future direction of stock prices, and act accordingly — is not a successful investing strategy.

The problem is, no one has consistently been able to identify market tops and bottoms, and the cost of not being in the market on the most important days is devastating to a long-term portfolio.Here's a hypothetical example of an investment in the S&P 500 over 50 years.Minus the best performing day $124,491Source: Dimensional Funds

 

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