How does market timing impact on investments?

An analysis of the daily returns of a particular Share Market Index for the period 1991 to 2000 (dividend income excluded) showed that missing out on performance of the equity market for only a few days could have a significant effect.

DIFFERENT RETURNS IF YOU MISS OUT ON A FEW DAYS

Strategy========================Return per annum
Always fully invested===============11.8%
Miss out on 10 best days============7.1%
Miss out on 20 best days============3.9%
Miss out on 30 best days============1.3%
Miss out on 40 best days============(-1.0%)

(Source:  Plexus Asset Management)

The table shows that:

• by missing only 10 days (equal to only 1 day a year), the annual return was reduced by nearly 40%.
• by missing 40 days (only 4 days a year), the return became a loss.

Instead of reducing investment risk, market timing can, in fact, be a high-risk strategy.