Man on Coin Stack

Studies that Prove Time Picking Doesn't Work

Man on Coin Stack

The literature is full of studies confirming the failure of market timing. All these peer- reviewed research papers and articles share the same conclusion. Forget about trying to time the market.

In the paper entitled, "Selectivity and Market Timing Performance of Fidelity Sector Mutual Funds," Dellva, Demaskey and Smith concluded that there was negative timing ability among the Fidelity sector funds during the period from 1989 to 1998.

In 1998, Becker, Ferson, Myers, and Schill studied market timing in their paper entitled, "Conditional Market Timing with Benchmark Investors." They found no evidence supporting the claim that funds have significant market timing ability.

Wei Jiang presents his market timing studies in his 2001 paper, "A Nonparametric Test of Market Timing." After spending countless hours combing through the results of 1,557 retail mutual funds and 210 institutional funds, Jiang concluded that timing ability on average is negative. Just as a side note, this paper lists 41 other academic studies in the reference section, providing further corroboration that market timing doesn't work.

Superstar academic William Goetzmann, along with Ingersoll and Ivkovich, put in their two cents with a paper entitled, "Monthly Measurement of Daily Timers." They performed four tests of timing skill on a sample of 558 mutual funds. They concluded that very few funds exhibit statistically significant timing skill.

In another paper written in 2002 by Johannes, Polson and Stroud, market timing was once again put to the test. Their simple yet powerful conclusion was that market timing strategies performed worse than the buy-and-hold strategy in all cases they examined.

To illustrate the extreme concentration of stock market returns, H. Nejat Seyhun carefully analyzed the 7,802 trading days for the 30 years from 1963 to 1993. Mr. Seyhum is the Chairman of Finance at the University of Michigan School of Business Administration, a position that is only achieved by highly dedicated and intelligent individuals who have spent many years learning how capital markets work. His conclusion provides a crushing blow to timers who think they can outsmart the market. A mere 90 days over 30 years contained 95% of all the market gains. That is an average of 3 days per year.

In "The Elements of Investing" by Burton Malkiel and Charles Ellis, the authors discuss a psychologist from Berkeley named Philip Tetlock, who studied over 82,000 varied predictions by 300 experts from different fields over 25 years, and concluded that expert predictions barely beat random guesses.  Ironically, the more famous the expert, the less accurate his or her prediction tended to be.

Another common question has to do with an investor who is just about to invest a large amount of cash in the market and is trying to decide whether they should invest it all at once or put in smaller amounts monthly or quarterly, often referred to as "wade or plunge". Mark Riepe from Schwab looked at this question and in his article titled Does Market Timing Work? he concluded: "Our research shows that the cost of waiting for the perfect moment to invest exceeds the benefit of even perfect timing. And because timing the market perfectly is, well, about as likely as winning the lottery, the best strategy for most of us mere mortal investors is not to try to market-time at all. Instead, make a plan and invest as soon as possible."

In summary, all of the above studies demonstrated that there is no evidence that time pickers can consistently know where the market is headed.