Investing Myths Debunked: Timing the Market Works?!

Summary

This video dives deep into the longstanding debate of 'time in the market vs. timing the market,' bringing to light the statistics and outcomes of both strategies. By analyzing the performance of the S&P 500 over two decades, it demonstrates the substantial impact of missing just a few of the market's best days, yet intriguingly reveals the colossal gains possible by avoiding the worst days. The discourse further explores the potential of the SPY 200-day moving average strategy as a systematic approach to sidestep market volatility, ultimately presenting a balanced view on investment strategies and encouraging viewers to choose based on their personal investing goals and preferences.

Takeaways

• 👍 'Time in the market beats timing the market' is a popular investment mantra, advocated by experts like Warren Buffet, emphasizing the importance of long-term investment over trying to predict market highs and lows.
• 📊 Analyzing S&P 500 investments from 2002 to 2022 reveals missing the 10 best days significantly reduces annualized returns from 10.7% to 6.3%, showcasing the impact of compounding and the cost of trying to time the market.
• 🤷 Missing the 20 or 40 best days can drastically reduce returns, even leading to negative returns over 20 years, highlighting the risk of attempting to time market entries and exits.
• 📖 Contrary research shows excluding the 10 worst days per decade could skyrocket returns to 3.79 million percent, suggesting a different angle on timing the market.
• 🔥 The best and worst days in the stock market often occur close to each other, usually during bear markets or the initial stages of bull markets, making it challenging to avoid one without missing out on the other.
• 🚩 A strategy involving the 200-day moving average aims to mitigate timing risks by identifying long-term trends, potentially doubling the performance of the S&P 500 ETF since 2000 by avoiding major bear markets.
• 🤖 Automating the 200-day moving average strategy through a bot or program could theoretically improve adherence to the strategy but comes with practical challenges, including taxes, commissions, and the need for ongoing oversight.
• 🚫 Backtesting reveals limitations and the potential for underperformance in certain periods, indicating no foolproof strategy exists for consistently outperforming a simple buy-and-hold approach.
• 💻 An active approach requires continuous monitoring and faith in the system, contrasting with the passive, set-and-forget nature of buy-and-hold strategies.
• 📚 The ultimate investment strategy depends on the individual's goals, risk tolerance, and whether they prefer a passive or active investment approach.

Q & A

What is the primary argument made by Warren Buffett regarding market timing?

Warren Buffett argues that trying to time the market is futile and investors are better off staying invested over the long term.

How does missing the 10 best days in the market over 20 years affect annualized returns according to the script?

Missing the 10 best days in the market over a 20-year period decreases annualized returns from 10.7% to 6.3%.

What is the 'clustering effect' mentioned in the script, and how does it relate to market timing?

The 'clustering effect' refers to the observation that the best and worst days in the stock market tend to occur close to each other, making it difficult to time the market accurately without missing significant gains or losses.

According to the script, what percentage of the stock market's best days occurred during a bear market or the first two months of a bull market?

According to the script, 78% of the stock market's best days occurred during a bear market or the first two months of a bull market.

What does the script suggest about the feasibility of avoiding both the best and worst days in the market?

The script suggests that while it is theoretically possible to improve returns by avoiding both the best and worst days, in practice, it is extremely difficult and might not be worth the effort.

What is the 200-day moving average strategy mentioned in the script, and how is it used?

The 200-day moving average strategy is a technical analysis tool where investors buy when the market price is above the 200-day moving average and sell when it is below, aiming to capitalize on the market's momentum and reduce losses.

How did the 200-day moving average strategy perform according to backtested data from the year 2000?

The backtested data from the year 2000 showed that the 200-day moving average strategy outperformed the S&P 500 ETF by nearly double, avoiding all four major bear markets in the past 22 years.

What potential downsides of the 200-day moving average strategy are highlighted in the script?

The script highlights downsides such as the reliance on backtested data, potential tax implications from frequent trading, commission costs, and the risk of overtrading in a sideways market.

What overall investing strategy does the script ultimately recommend?

The script recommends a buy-and-hold strategy, especially for passive investors, suggesting that it is generally more effective and less risky than trying to time the market.

What is the importance of understanding the 'ultimate objective of the investor' as mentioned in the script?

Understanding the ultimate objective of the investor is important because it helps in choosing the right investment strategy, whether it's active market timing or a passive buy-and-hold approach, based on personal goals, risk tolerance, and investment horizon.

Outlines

00:00

📊 Debunking Market Timing Myths

The script challenges the widely held investment advice that 'time in the market beats timing the market,' a philosophy popularized by investors like Warren Buffet. It delves into statistical analysis to explore the validity of this claim, using the S&P 500's performance from 2002 to 2022 as a case study. The analysis reveals that missing the market's 10 best days significantly reduces annualized returns, highlighting the difficulty of market timing and its impact on investment growth over time. The narrative shifts to present counterarguments, showing how avoiding the market's worst days could drastically improve returns, suggesting that conventional wisdom might not always hold true. It concludes this section by questioning the feasibility of successfully timing the market to avoid its worst days without missing out on its best.

05:00

🔍 Analyzing Best and Worst Market Days

This segment delves deeper into the dynamics of the stock market's best and worst days, particularly during bear and bull markets. It cites research from Hartford Funds to demonstrate that a significant portion of the market's best days occur during or just after bear markets, complicating the strategy of trying to avoid downturns without missing out on rapid recoveries. The narrative provides a detailed examination of market patterns during the 2020 pandemic and the 2022 bear market, illustrating the 'clustering effect' where the best and worst days often occur in close succession. It introduces the concept of excluding both the best and worst days to achieve outperformance, suggesting that while theoretically appealing, this strategy is fraught with practical difficulties, including the unpredictable nature of market movements.

10:02

📈 Evaluating the 200-Day Moving Average Strategy

The final section introduces the 200-day moving average strategy as a method that claims to outperform the traditional buy-and-hold approach by attempting to dodge both the best and worst market days. It explains the strategy's basics, its potential benefits according to backtested data, and its application through a systematic, rule-based approach to enter and exit the market. The narrative critically assesses this strategy, considering practical challenges such as the impact of taxes, trading commissions, and the psychological aspect of sticking to a predefined system. It highlights the variability in strategy effectiveness across different market conditions and concludes with a nuanced discussion on the overall feasibility and desirability of active versus passive investment strategies, inviting viewers to form their own opinions.

Keywords

💡Time in the Market

The concept of 'Time in the Market' suggests that long-term investment holding is generally more beneficial than attempting to predict market highs and lows to make trades ('timing the market'). The video emphasizes this by illustrating how staying invested in the S&P 500 over 20 years, with dividends reinvested, yields significantly higher returns compared to trying to time the market and potentially missing out on the best trading days.

💡Timing the Market

Timing the Market refers to the strategy of making investment decisions based on predicting future market movements, aiming to buy low and sell high. The video argues against this approach by presenting data on how missing just a few of the best market days can drastically reduce investment returns, emphasizing the difficulty and unpredictability of market timing.

💡S&P 500

The S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. The video uses the S&P 500 as a reference point for discussing long-term investment returns, highlighting how investments in the index would have performed over a 20-year period.

💡Annualized Return

Annualized Return refers to the geometric average amount of money earned by an investment each year over a given time period. The video mentions that missing the 10 best days in the market can reduce the annualized return from 10.7% to 6.3%, demonstrating the impact of market timing on long-term investment gains.

💡Compounding

Compounding in the context of investing refers to the process where the value of an investment increases because the earnings on an investment, both capital gains and interest, earn interest as time passes. The video underscores the importance of compounding by pointing out the significant difference in absolute dollar amounts over 20 years due to a 4% difference in returns, which highlights the power of staying invested.

💡Bare Market

A 'Bare Market' is likely a misprint for 'Bear Market,' which is a market condition where securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. The video examines past bear markets to discuss how the best and worst trading days often occur close to each other, making it difficult to avoid losses without also missing out on substantial gains.

💡200-Day Moving Average

The 200-Day Moving Average is a technical analysis tool that averages the closing prices of a security over the past 200 days to determine its overall trend. The video explores a strategy based on this indicator, suggesting that staying invested when the price is above the 200-day moving average and moving to cash when it's below can potentially yield better returns than a simple buy-and-hold strategy.

💡Momentum

Momentum in investing refers to the tendency of securities to continue moving in the same direction for some time. The video discusses using the momentum indicated by the 200-day moving average to decide when to enter or exit the market, aiming to capitalize on the trend's continuation and avoid downturns.

💡Buy and Hold

Buy and Hold is an investment strategy where an investor buys stocks or other securities and holds them for a long period regardless of fluctuations in the market. The video contrasts this strategy with market timing and discusses its merits, particularly in the context of passive investors who prioritize long-term gains over short-term market movements.

💡Clustering Effect

The Clustering Effect refers to the tendency for good and bad trading days to occur in close succession within financial markets. The video uses this concept to argue against market timing, noting that the best and worst days often cluster during volatile periods, such as bear markets, making it challenging to avoid losses without also missing out on significant gains.

Highlights

Introduction to the debate on timing the market versus time in the market, with a dive into hard numbers and hidden findings.

Discussion on famous investors like Warren Buffett advocating for a buy-and-hold strategy over market timing.

Analysis of investing in the S&P 500 over 20 years, showing significant loss in returns from missing just the 10 best market days.

Calculation showing how a 4% difference in annualized returns can compound to a twofold increase in investment over 20 years.

CNBC article reference highlighting how missing the S&P 500's 10 best days each decade drastically reduces returns.

Revelation of overlooked data avoiding the worst 10 days each decade could dramatically increase returns.

Introduction of a contrasting perspective on avoiding market downs and the clustering effect of best and worst market days.

Statistical insight that 78% of the stock market's best days occur during bear markets or the initial months of bull markets.

Example of day-to-day market volatility during the 2022 bear market and the pandemic-driven market of 2020.

Insight into the 'clustering effect' between the best and worst market days, complicating timing strategies.

Analysis showing outperformance by excluding both the best and worst market days, suggesting a nuanced approach to market timing.

Introduction of the SPY 200 day moving average strategy as a potential method to time the market effectively.

Explanation of the 200 day moving average strategy, including rules for when to buy, hold, or sell.

Back-tested data showing that the 200 day moving average strategy could have avoided major bear markets and doubled returns compared to the S&P 500 ETF.

Discussion on the challenges of implementing the 200 day moving average strategy, including taxes, commissions, and the psychological aspect of active management.

Conclusion emphasizing the importance of aligning investment strategies with individual objectives and preferences.

Transcripts

time in the market is better than timing

the market so you have probably seen

this advice from famous investors like

Warren Bufford telling us it's pointless

to try to time the market that we should

just buy and hold forever but is there

more that meets the eye well personally

I went down the rabbit hole to dig into

the hard numbers behind this code and

listen I actually discovered some hidden

findings that may actually surprise you

so in this video I'll lay down the case

from both sides and allow you to be the

judge no h but so if you love videos

like this remember to show your support

by subscribing to us oh and please help

hit the like button as well for me to

hit my

kpi so here's the thing this

conversation around timing the market

was once again brought to the attention

of the investing Community during the

fun Smith's annual shareholder meeting

so the argument is relatively simple

assuming the various scenarios so first

if you were to invest in the S&P 500

with dividends reinvested for 20 years

from 2002 to

2022 and just stay fully invested

throughout it would have given you over

twice the amount of money compared to

when someone timing the market and

missing the 10 best days in the market

so there are some truths here when we

think about it so within a span of 20

years there's

7,35 days yes given that not every day

is a trading day and if you were to

deduct around 35% of that number to

account for both weekends and holidays

that's

5,113 days so just missing the 10 best

days your analized return will be

punished from 10.7% perom to 6.3% perom

so in percentage terms that might sound

small but don't forget that investing is

a compounding activity a 4% difference

doesn't sound a lot but when you compare

the difference in absolute dollar amount

it's two times more over 20 years so

with that same train of thought missing

the 20 best days would make your returns

go down to 3.4% perom the worst missing

just 40 best days and your returns will

actually go into the negative territory

even after 20 years negative

congratulations on holding on for 20

years but making zero returns similarly

an article by CNBC back in 2021 Echoes

similar sentiments with an ey grabbing

headline this chart shows why investors

should never try to time the stock

market long story short looking at the

data going back to 1930 Bank of America

came to a similar conclusion that if an

investor missed the S&P 500's 10 best

days in each individual decade the

returns would stand at only 28% if on

the other hand the investor actually

helped steady through the ups and downs

the return would have been a mind

staggering

17,7 15% but here's the interesting

thing that's only part one of the story

at least until now we have been told the

story that it's extremely extremely

extremely unlikely that you'll be able

to time the market perfectly and even if

you do you are at the precarious

position because you would have missed

the best few days your overall returns

profile will take a significant hit and

I think for the lay men there's no

doubts or even arguments around this

phenomenon but here's the second part

most people don't talk about in that

same piece actually published by CNBC

with the data from Bank of America there

were two additional columns that were

intentionally excluded what if on the

contrary rather than just excluding the

best 10 days per decade we exclude on

the flip side the worst 10 days per

decade so do you want to take a guess

what the returns would be in state so

it's not one it's not two it's 3.79

million per. yeah if you exclude the 10

best days your returns would be 28% if

you buy and hold and forget your returns

would be 17.7 th000 per. if you exclude

the worst 10 days it's 3.79 million per.

so for those of you watching this video

up until this point you might suddenly

feel enlightened so rather than trying

to catch the stock market bottom why not

just focus our efforts and attention on

how to avoid the big Market draw Downs

in state right so I think we have to

hold our horses so here's the key thing

regardless of whether you're trying to

time the market tops or even the market

bottoms they're equally H if not near

impossible truthfully I think it's not

worth the time to do so see when we look

back at the past five bare Market

the 2022 inflation interest rate driven

bare Market the 2020 pandemic be the

2008 great financial crisis the 2000.com

bubble and the 1990 Gulf War there is a

similar pattern in how the best and

worst days actually present themselves

in an entire stock market history so

according to heart for funds avoiding

the markets Downs May actually mean that

missing out on the UPS as well so 78% of

of the stock market best days occurred

during a bare Market or during the first

two months of a bull market so good days

actually happened more often in bad

markets sounds counterintuitive right so

from their research of the time period

between 1994 to

2023 50% of the best days occurred

during the bare Market 28% happened

during the first 2 months of the bull

market and only 22% happened during the

rest of the Boom market so let's take

the 2022 bare market for example so I

extracted the daily performance of the

Spy which is an ETF that tracks the

performance of the S&P 500 so I compar

the daily closing prices so the best day

during the 10-month period January to

October of 2022 was the 24th of June

2022 which closed 3.18% higher than the

previous day but then they went on to

experience 48 days right after so the

worst day it was the 13th of September

with a negative 4.35% closing coming

right after four consecutive green days

prior to that so if to push this back by

one bare Market looking at the 2020

pandemic instead you can observe a

rather similar pattern where the best

and worst days tend to Cluster together

and if you to still remember there were

even double digit draw down days but

they were intercepted by large green

candlesticks as well an example would be

from the 12th of March 2020 to the 16th

of March the first day the S&P is down

99.5% on the kns it's up 8% and after

the weekends it's down nearly -1%

therefore this explains the so-called

clustering effect between the best and

also the worst days so unless you are

able to confidently say that you can

predict accurately on whether the market

will have its worst or even best days

you are probably going to miss them both

in your attempt to try to time the

market however ever here's the kicker if

we were to exclude both the best and

worst P days per decade we would still

be able to achieve decent outperformance

over the Buy and Hold strategy with a

27,000 per return versus a 17,000 per

return so the million dollar question is

there really a reliable way for us to

try to time both the ins and outs of the

market avoiding both the best and worst

days interestingly while I was searching

around for answers I actually found out

something that came close to it which is

the Spy 200 day moving average strategy

and it Prides itself on beating the buy

and ho so what is the 200 day moving

average so it is one of the most popular

tools or indicators used by my technical

analysis friends to determine whether a

particular stock an ETF or anything

under the sun whether are they on an

uptrend or whether they're on a

downtrend simply put it's the average of

the previous 200 days of Cl closing

prices so in simple technical analysis

terms it's bullish when the price is

above the 200 moving average and it's

bearish when the price is below the 200

moving average and to quote Paul Jones

who is a successful American billionaire

hedge fund manager and I quote my metric

for everything I look at is the 200 day

moving average of closing prices so I've

seen too many things go to zero stocks

and commodities the whole trick to

investing is how do I keep myself from

losing everything if you use the 200 day

moving average rule then you get out you

play defense and you get out essentially

there is only one concept you have to

grasp here the trend is your friend the

rules for this strategy is rather simple

so here's the four-step trading rule if

you're long on the index on the last

trading day of the month and the price

actually closes above the 200 simple

moving average you stay long if the

index actually close under the 200

simple moving average you sell

everything and you hot cash on the flip

side if you're on cash currently and the

price actually close above the 200

simple moving average you go back and

long the index again and if you're in

cash and the index actually close under

the 200 simple moving average you keep

your cash position so the results it's

actually quite interesting so according

to back tested data from the year 2000

the system with that particular

four-step trading rule had 13 entry and

13 exits and they actually avoided all

four major bare markets in the past 22

years and outperform the SPI ETF by

nearly double so the core idea is to

essentially ride on the momentum of the

market and through this systemized

approach attempt to avoid both the best

and also the worst days of the market

cycle of course this is based on

someone's system of rebalancing the

portfolio at every month end simply by

looking at the 200

of the index so some of you might ask

why don't we quote a board or even a

program to follow these rules on a daily

basis making it even more timely

theoretically of course this is possible

and in fact it might even be highly

encouraged for you to stick closer to

the trading rules however I would also

like to highlight the potential downside

of this strategy first This research is

predicated on back tested data for the

last 20 odd years from the year 2000 so

I've always loved the code from Mark TW

it a what you don't know that gets you

into trouble it's what you know for sure

that just a so so like most things in

life it works until it doesn't secondly

this back test was done in a very very

controlled environment with many

assumptions in place so we have yet to

consider a few pragmatic but important

issues so for investors that operate in

a jurisdiction that enforce capital

gains taxes so from the back test you

can actually observe that there were

multiple periods where the momentum

didn't continue on for more than a year

and by realizing the gains prematurely

you will be subjected to Hefty tax bills

also we did not consider the cost of

commissions throughout the process as

well so depending on the broker that you

use if you have a sizable Capital coming

in and out of the market frequently

enough especially if you program a

bought to follow the 200 on a daily

chart your returns might be heard by the

commissions so the worst case scenario

is if the market actually chops sideways

and it floods around the moving average

think about it if the market closes

above below above below and that's when

your bought or your program will enter

and exit based on the rules that were

set prematurely and that's when all the

commission charges will it into your

returns thirdly of course it's always

about the operator I.E the investor

himself so compared to a Buy and Hold

strategy where most passive investors

can virtually Buy and then forget about

it if you're taking an active approach

to employ some sort of strategy like

this you will need to still monitor your

program make sure that the Bard or the

program doesn't do anything stupid more

importantly you also have to trust a

system and to not interfere too

frequently with your discretionary

judgment which will ultimately defeat

the purpose of the strategy because it's

supposed to be methodical and

emotionalist so the good thing about

back testing is that you are given the

environment to think clearly and to

think logically however when it comes to

the real execution with a lot of money

on the line our actions and judgments

might be clouded from the CNBC table you

can also observe that there were moments

in the decade where despite missing both

the good and bad days you're still

underperform the Buy and Hold strategy

which kind of suggests that it's not

necessarily A foolproof way so there you

have it this is our unbiased approach to

breaking down time in the market versus

timing the market so if you to ask us

for our opinion we have to go back to

the ultimate objective of the investor

himself so if we are really coming in

from an angle of being a passive

investor freeing up our time for

something else then I would think that

Buy and Hold should still be the main

strategy so what is your take on this

after hearing from both sides I look

forward to understanding your

perspective in the comment section down

below so this is CK from pan profits

signing off till next time keep winning

[Music]

[Applause]