Market timing requires being right twice, and the good days cluster in the bad times
The claim
Being out of the market for a small number of the strongest periods removes a large share of long-run returns, and those periods occur disproportionately during drawdowns.
Why we rate it moderate
The arithmetic is solid and easily reproduced. The way it is usually presented is one-sided, because the symmetric case — avoiding the worst days — is rarely shown alongside it.
Long-run equity returns are extremely concentrated in time. Miss the ten best years of a thirty-year stretch and you lose the majority of the gain. Our tool reproduces this on the actual return series, and the effect is as large as advertised.
But the honest version shows the other side. Avoid the ten worst years and you finish far ahead of buy-and-hold. Presented alone, the 'best days' statistic implies timing is impossible; the symmetric figure shows that timing would be enormously valuable if you could do it. Both are true, and only showing one is an argument dressed as evidence.
The real case against timing is structural. The best and worst days cluster together, inside the same volatile periods — the largest single-day gains in market history sit within weeks of the largest falls. Anyone who successfully sells before a crash is holding cash exactly when the sharpest rebounds occur, and must then decide to buy back into a market that still feels terrible. Sharpe estimated that a timing strategy needs to be right around three quarters of the time simply to break even against buy-and-hold, once you account for the costs and the missed upside. That is a high bar, and there is no evidence that individual investors, or the funds that market the capability, clear it.
Where this breaks down
- The 'missed best days' figure is sensitive to the period chosen. Its magnitude depends heavily on whether the window includes 2008-2009 or 2020.
- This is an argument against discretionary timing on sentiment, not against rules-based rebalancing or a deliberate, planned change in allocation as your horizon shortens.
- Holding cash for a known near-term expense is not market timing. It is matching an asset to a liability, which is exactly what you should do.
Sources
Follow these rather than taking our word for the summary.
William F. Sharpe (1975). Likely Gains from Market Timing
Financial Analysts Journal, 31(2), 60-69
Finding: A market timer must be correct roughly 74% of the time to outperform a simple buy-and-hold strategy.
Brad M. Barber and Terrance Odean (2000). Trading Is Hazardous to Your Wealth
The Journal of Finance, 55(2), 773-806
Finding: Frequent traders underperformed the market substantially; the stocks they bought underperformed those they sold.