World’s Worst Market Timer: A Story and A Lesson

By Justin Carbonneau

Imagine this: 80 years ago, you won a prize that promised 13 payments of $10,000 to be paid out over time. You think you’ve finally got lucky, hit the big one. That is, until you read the fine print:


Terms & Conditions

  1. You must invest the money in the U.S. market, as represented by the S&P 500.
  2. You can’t touch the money once invested.
  3. You can’t look at the investments’ performance until mid-2020.
  4. The thirteen, $10,000 payments you receive will be invested at each bull market peak starting in 1940. This means, you will invest each 1/13th portion of money, at the very top of the market across all bull markets over the last 80 years.

Fast forward to 2020, when it’s finally time to see just how little money you have left. You look at all the major bear markets over the past eight decades and the accompanying declines, along with the recent drop of over 33% in less than a month due to COVID-19 and the global economic shutdown.

The data below only confirms what you already know, that you’ve most likely secured the title of the worst market timer ever and you’ve all but secured the bear market cumulative losses. You envision being listed on Wikipedia on market timing page. You are all but doomed.

History of Bear Market Declines

Peak Date% Decline
11/9/1940-34.50%
5/29/1946-26.60%
6/15/1948-20.60%
7/15/1957-20.70%
12/12/1961-28.00%
2/9/1966-22.20%
11/29/1968-36.10%
1/11/1973-48.20%
11/28/1980-27.10%
8/25/1987-33.50%
3/24/2000-49.10%
10/9/2007-56.80%
2/19/2020-33.90%
Source: Yardeni Research: Stock Market Briefing: S&P 500 Bull & Bear Market Tables

When you finally drum up the courage to check your performance you open your account, eyes closed, and brace yourself for the certain disaster that has befallen the fortune you once had.

As you open one eye, you see the numbers 8-4-3. You open the other eye, and see 3-7-6-0. You rub your eyes just to make sure you’re seeing clearly. Could there be seven digits?

What? Your $130,000, which was invested over an eight-decade period in all bull market peaks—what you thought was the worst possible points to invest in the stock market— is now up over 6300%.

Your $130,000 is now worth $8,433,760.

How can this be?

Time in the Market Beats Timing the Market

There is an old adage that says, “time in the market beats timing the market,” a concept missed by the investor in our story who believed the investments were predestined to fail because of buying at the wrong time – at the peak of every bull market – thirteen times throughout history. But what our investor didn’t understand was that the caveat with the biggest influence wasn’t the restriction on when to invest the money (although that certainly is important if you are lucky and disciplined enough to be buying long-term assets like stocks when they decline in value), but rather the requirement to invest the money over time with discipline, not selling out of stocks and not looking at the investments. These restrictions helped the unwitting investor  maintain the discipline needed in order to stay invested over time.

The Anatomy of Bull & Bear Markets

  • Over the last 80 years, we have seen thirteen bear markets in U.S. large cap stocks, which amounts to one every six years or so.
  • On average, bear markets have seen declines of around 33.6% and the average duration is around 380 days or just a bit over a year.
  • Bear markets, on average, tend to be shorter than bull markets, which typically last about 4.5 years.

Of course, averages tend to mute the outliers:  For instance, the 2000 and 2008/2009 bear markets saw declines of 49.1% and 56.8%, respectively, declines that were far worse than the average. Also, from 1973-1974 and 1980-1982, we saw bear markets that lasted nearly two years, whereas the most recent bear market in 2020 lasted only 33 days.

If you don’t think this fable has relevance today, think again. According to a recent Wall Street Journal piece, of the self-directed investors at Fidelity Investments who made changes to their portfolio between February and May, 33% of those investors over the age of 65 sold all of their stock holdings during this period. These investors are now faced with a series of difficult decisions – reinvest now, wait for stocks to pull back and reinvest, dollar-cost-average in or don’t invest in stocks at all.

Lessons from a Market Timing Story

Most investors see large declines and think they are likely to continue, so they feel compelled to sell out of stocks. This is a combination of recency bias, loss aversion and overconfidence – the big three of behavior biases that get investors in trouble and hurt long-term returns. Bear markets seemingly come out of nowhere and the combination of fear and the fact that the pain of losing money is psychologically about twice as powerful as the pleasure of gaining money, it’s easy to understand why these periods do so much damage to investors’ returns. Jim O’Shaughnessy of O’Shaughnessy Asset Management discussed this very idea – i.e. how our emotions get the best of us during bear markets – in one of our recent Excess Returns podcasts.

Every investor is unique and needs to make their own decisions based on how much market risk they are willing to accept, but this fictional and cautionary tale offers important lessons for long-term stock investors.

When you imagine the worst market timer in the world, don’t assume it will be the investor who times every entry into stocks right before the next bear market comes along, but rather the long-term investor who gets out and never gets back in. No matter what the fine print, they usually end up losing.

Note: Some investors may take issue with not including the Great Depression of the 1930s, and the figures like the worst bear market and duration of bear markets would certainly change for the worse, but the key message of long term investing and compounding over decades would remain the same.


Justin J. Carbonneau is VP at Validea & Partner at Validea Capital Management.
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