A Wall Street Illusion

This past year has been essentially flat for the stock market as measured by the S&P 500. It closed at 2058 on January 2nd and at 2078 on December 1st, but in that time it has been as high as 2130 (on May 21st) and as low as 1867 (on August 25th). If only one could buy at the low for the year and sell at the high, his or her return would be 14%, significantly better than 0.97% year to date. Surely there has to be someone who accurately predicted the swings in the market this year? Several studies have been undertaken to determine precisely this vexing question. In one of those, two professors decided to analyze 15,133 recommendations by 237 investment newsletters from June 1980 to December 1992. By the end of the time period, more than 224 of the newsletters had gone out of business. Their conclusion, “…performance of investment newsletters is no better than, and potentially worse than, what would be expected from a set of letters that offer random recommendations.”[1]

We at LJCooper use this and other evidence based financial science. We understand that securities prices move on news and events which cannot be predicted in advance. Which is why we advocate a passive, low cost, buy-and-hold investment strategy suited to your risk tolerance. We understand that much of a stock market’s big gains, as well as losses, are concentrated in just a few trading days each year. A study done by University of Michigan professor H. Nejat Seyhun found that out of 10,573 trading days for the 42-year time period from 1963 to 2004, 96% of all those years of market gains were generated on just 90 total days. In other words, 96% of the returns generated between 1963 and 2004 occurred on 0.85% of the available trading days.[2] From this we can clearly see the importance of being, and staying, invested in the market, during all its up and downs.

Decades of academic research continues to arrive at the same conclusion: market timing offers no advantage. We believe that the best opportunity to earn market returns is to invest in a diversified, low cost, risk appropriate portfolio for the long haul.

 

 

[1] John Graham and Harvey Campbell, “Market Timing Ability and Volatility Implied in Investment Newsletters’ Asset Allocation Recommendations”, Journal of Financial Economics, vol. 42, no. 3 (1996)

 

[2] H. Nejat Seyhun, University of Michigan, “Stock Market Extremes and Portfolio Performance 1926-2004,” commissioned by Towneley Captial Management, 2005

Categories: Management Style, Wealth Advisors

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Aaron Henderson