It's better to buy and hold than to miss a good thing 'timing' the market


January 30, 1995|By JANE BRYANT QUINN

NEW YORK -- At the end of December, conventional wisdom predicted a drop in the stock market this winter, because interest rates were going up. High rates pull money out of stocks.

By mid-January, a new case was being made. Stock prices would rise, because interest rates were about to top out.

By the end of January, sentiment may shift again.

This waffling should remind investors why it's futile to watch for the "right" time to buy. Market timers try to buy when stock prices are swinging up and sell (or stay in cash) when prices seem ready to go down.

But perfect timing is impossible and missing just a few good days is surprisingly costly over the long term. For proof, I offer a timely new study of stock fluctuations by H. Nejat Seyhun, chairman of the finance department of the University of Michigan School of Business Administration. He analyzed a composite index of stocks on the New York and American exchanges as well as on Nasdaq, to see how good you'd have to be to turn your market predictions into profits.

The odds are daunting. For example, take the 7,802 trading days from 1963 through 1993. If you were out of the market during the 90 best days -- just 1.2 percent of the time -- you'd have lost an amazing 95 percent of all the market's gains.

One dollar invested in 1963, and not touched for the entire 31 years, would have grown to $24. But the investor who missed those special 90 days, which were scattered throughout the period, would have seen his dollar grow only to $2.10. That's less than he'd have earned by staying in one-month Treasury bills.

Applying the same analysis to the 816 trading months of 1926 through 1993, Mr. Seyhun found that a buy-and-hold investor could have turned a dollar into $638.30. But practically all of that gain -- 99 percent -- occurred during 48 months, scattered over the 68-year span.

Here's an even more dramatic finding: Had you missed the single best month between 1926 and 1993, your dollar would have grown to just $461.60 -- more than 28 percent less than if you had simply bought and held. There's no way to guess that lucky month -- or, for that matter, the lucky 48 months. You have to be in the market already and pick up the windfall when it comes.

Market timers object that studies like these look only at the bright side. Had you been out of the market during the worst month since 1926, your dollar would have grown to $898 -- 41 percent more than if you had simply bought and held.

But ask yourself this: How good was your chance of avoiding that disastrous month (it was September 1931)? And since the stock market rises more often than it falls, how many good months would you have missed while trying to duck one that might be bad?

Wesley McCain of Towneley Capital Management, an investment management firm in New York that financed the Seyhun study, says its findings also call dollar-cost averaging into question. Conventional wisdom says that lump sums of money should be invested over several months. That reduces your risk. If stocks happen to fall during the time that you're putting your money into the market, staged investments will reduce your average price.

But stocks might also rise while you're investing, which increases your average price. And by delaying, you might miss ** one of those magic moments when stocks spurt.

If your fear of a price decline is paramount, then dollar-cost-average by all means. Keep your cash in a money-market fund and feed it gradually into stocks or mutual fund shares. That's also a reasonable strategy when stock prices are historically high. But when stocks have dropped, the odds strongly favor lump-sum investing.

Market timing is primarily a strategy for reducing risk. Market-timing managers and newsletters make you feel good because they're out of stocks during some of the months that stocks decline.

But they're also out of stocks during some of the times that prices rise. And because of that, market timers, on average, do worse than the stock market over time. That's the verdict of Morningstar Mutual Funds, a Chicago newsletter that follows funds, and Hulbert Financial Digest, which tracks the perform- ance of investment newsletters.

Investors are better off if they buy and hold.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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