John Bogle, founder of the Vanguard Group of Investment Companies said, "In 30 years in this business, I do not know anybody who has done it successfully and consistently, not anybody who knows anybody who has done it successfully and consistently. Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive."
Over a fifty-four year period, the market has risen in 36 years, been even in 3 years and declined in only 15 years. Thus, the odds of being successful when you are in cash rather than stocks are almost 3 to 1 against you.
An academic study by Professors Richard Woodward and Jess Chua of the University of Calgary shows that holding on to your stocks as long-term investments works better than market timing because your gains from being in stocks during bull markets far outweigh the losses in bear markets. The professors conclude that a market timer would have to make correct decisions 70 percent of the time to outperform a buy-and-hold investor. Have you met anyone who can bat 0.700 in calling market turns?
An examination of how mutual funds have varied their cash positions in response to their changing views about the relative attractiveness of equities.
Mutual fund managers have been incorrect in their allocation of assets into cash in essentially every recent market cycle.
Caution on the part of mutual-fund managers (as represented by a very high cash allocation) coincides almost perfectly with troughs in the stock market.
- Peaks in mutual funds' cash positions have coincided with market troughs during 1970, 1974, 1982, and the end of 1987 after the great stock-market crash.
- Another peak in cash positions occurred in late 1990, just before the market rallied during 1991, and in 1994, just before the greatest six-year rise in stock prices in market history.
- Cash positions were also high in late 2002 and in March 2009, at the trough of the market.
Conversely, the allocation to cash of mutual-fund managers was almost invariably at a low during peak periods in the market.
- For example, the cash position of mutual funds was near an all-time low in March 2000, just before the market began its sharp decline.
Ref: A Random Walk Down Wall Street by Burton G. Malkiel
- to make sure that when you buy you do not pay too much for your stocks.