Perfect vs. Terrible Market Timing
Consider four hypothetical investors who each invested $10,000 a year for 20 years. Investor #1 has perfect timing—investing $10,000 when the market is at its lowest point each year; Investor #2 invests on the first trading day each year; Investor #3 invests at the market’s highest level each year; and Investor #4 avoids the S&P and invests $10,000 at the beginning of each year in T-bills. The table below shows the return each investor would have experiencing by averaging all 20-year period returns from 1926-2010.
$10,000 invested each year for 20 years
[all 20-year periods from 1926-2010]
|
Investor |
Average Return |
|
#1: perfect timing each year |
$921,000 |
|
#2: $10,000 invested 1st day each year |
$856,000 |
|
#3: worst timing each year |
$746,000 |
|
#4: no stocks (S&P 500), 100% in T-bills |
$332,000 |