A simple market timing model

While no market timing model will perfectly save you from all price drops, a fix as easy as using a 9-month simple moving average can improve the performance of your long equity portfolio. Performance  is superior to buy and hold - not only in terms of absolute gain, but also with lower risks (volatility of portfolio and drawdowns).

Jan 1994 - Aug 2017
Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown
Timing Portfolio $10,000 $120,581 11.09% 10.04% 38.05% -4.42% -15.28%
Buy & Hold Portfolio $10,000 $82,060 9.30% 14.45% 38.05% -36.81% -50.80%

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How to time your mutual fund investments

Short answer - don't.

Summary:

  • Investors generally time their entry and exit of mutual funds badly, going in and pulling out at wrong times, such that their realized returns are lower than the fund's reported return
  • For most investors, it is better to simply buy and hold mutual fund investments (after doing necessary homework) rather than actively trade it
  • For those wishing to exploit this tendency and generate a return higher than the mutual fund itself, the paper has generic details

 

Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies
JASON HSU, BRETT W. MYERS, AND RYAN WHITBY

Do Stocks Outperform Treasury Bills

This is a good research paper on stock picking.

In summary, most active managers fail to beat the benchmark because the skew of returns is positive - a small number of stocks are responsible for a good part of the gains. Therefore the very definition of stock picking (selecting a few stocks) is statistically bound to produce many who fail to pick these ten-bagger stocks and thus underperform the benchmark.

Unless you have superior information (know in advance what these stocks are), you are likely better off sticking to an index - by buying a big bunch of stocks via an index, you will at least capture a few of these outperforming stocks.

Link to paper

Bessembinder, Hendrik, Do Stocks Outperform Treasury Bills? (July 17, 2017). Available at SSRN: https://ssrn.com/abstract=2900447