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If you buy near market bottoms, you should do better than Buy and Hold right?

If you are the best market timer in history, you should easily do better than someone who just adds and adds without thinking isn’t it?

Ben Carlson over at Wealth of Common Sense points out this splendid work done by Gaspar Fierro, a blogger at Spanish website Rankia > The best investor in history (note this is in Spanish. Use Google Translate to Translate it)

Here are the rules:

  • The Great Market Timer invest in MSCI Index, be it in major countries index specified below, or major MSCI World index
  • The Great Market Timer starts with $1000 and starts saving $50 monthly
  • Suppose the Great Market Timer can see into the future, and in the next 52 week, if the price is 17% from the bottom, he will dump whatever $50 saved up till then into the index. If the price plunges, but does not reach 17% from the bottom, he does not add to it. This is also assuming that no one can get the bottom right consistently but that you always put in lower than the B&H guy
  • To compare to the Great Market Timer, the B&H guy puts in $1000 in the same index. He saves $50 monthly and after 12 months, he invest the accumulated sum
  • Both investors do not sell
  • Dividends are reinvested
  • The writer uses monthly closing prices.
  • The time range is fixed
  • B&H and Great Market Timer starts on the same day

The result is above (do click to view larger image)

This data goes back to 1970.

The author was rather comprehensive. And as Singaporeans, you will be disappointed with no Singapore index, but there are Hong Kong and MSCI World Index

First thing first, market timing has a better result (refer to the last 3 column, B&H vs B&H|Buy the bottom). But the most surprising thing to both the author and Ben (as well as myself): The difference isn’t that much.

The author cites some reasons why the result is so close:

  1. The Great Market Timer missed out on much of the dividend yields. This is because he only buys during rebounds, recoveries and expansions
  2. The price of his holdings is often higher than the criteria for him to get invested. Since equity markets generally heads up, he didn’t get much opportunity to get invested, due to that strict rule
  3. Lack of the compounding effect

Would this prove to be useful? It is only useful to know that

  1. It is damn difficult to have a crystal ball and be right market timing correctly every time
  2. Buy and hold is the easier method, but you have to stomach the max draw down (refer to MaxDD)
  3. Dividends Reinvestment is a big part of the equation
  4. Your mileage may vary
  5. At least someone did some data other than US data!

Can you buy the index? You can because there are exchange traded funds (ETF) listed that tracks these indexes. Its just that in Singapore it is rather problem sometimes.

Some further readings:

  1. MSCI World rolling returns over 20, 15,10,5 years net dividend reinvested
  2. The global stocks index fund in Singapore
  3. Dollar cost average into STI ETF right before the Great Financial Crisis revisited

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