A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

THE VERDICT ON MARKET
TIMING
Many professional investors move money from cash to
equities or to long-term bonds on the basis of their forecasts
of fundamental economic conditions. Indeed, this is one
reason many brokers give to support their belief in
professional money management. The words of John Bogle,
founder of the Vanguard Group of Investment Companies,

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are closest to my views on the subject of market timing.
Bogle said, “In 30 years in this business, I do not know
anybody who has done it successfully and consistently, nor
anybody who knows anybody who has done it successfully
and consistently. Indeed, my impression is that trying to do
market timing is likely, not only not to add value to your
investment program, but to be counterproductive.”
Bogle’s point may be illustrated by an examination of how
mutual funds have varied their cash positions in response to
their changing views about the relative attractiveness of
equities. Mutual-fund managers have been incorrect in their
allocation of assets into cash in essentially every recent
market cycle. Caution on the part of mutual-fund managers
(as represented by a very high cash allocation) coincides
almost perfectly with troughs in the stock market. Peaks in
mutual funds’ cash positions have coincided with market
troughs during 1970, 1974, 1982, and the end of 1987 after
the great stock-market crash. Another peak in cash positions
occurred in late 1990, just before the market rallied during
1991, and in 1994, just before the greatest six-year rise in
stock prices in market history. Cash positions were also high
in late 2002 and in March 2009, at the trough of the market.

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Conversely, the allocation to cash of mutual-fund managers
was almost invariably at a low during peak periods in the
market. For example, the cash position of mutual funds was
near an all-time low in March 2000, just before the market
began its sharp decline. The ability of mutual-fund managers
to time the market has been egregiously poor.
Over a fifty-four-year period, the market has risen in
thirty-six years, been even in three years, and declined in only
fifteen. Thus, the odds of being successful when you are in
cash rather than stocks are almost three to one against you.
An academic study by Professors Richard Woodward and
Jess Chua of the University of Calgary shows that holding on
to your stocks as long-term investments works better than
market timing because your gains from being in stocks during
bull markets far outweigh the losses in bear markets. The
professors conclude that a market timer would have to make
correct decisions 70 percent of the time to outperform a buy-
and-hold investor. I’ve never met anyone who can bat .700 in
calling market turns.