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"The Plain Truth About Market Timing " - Bill Lussenheide

Many believe that the use of a timing trading strategy is futile or even a deterrent to a profitable portfolio. I tend to agree if you are talking about a non-defined strategy of just going by your moods or the stars or some other non mathematical approach.

The cynics say that if timing took you out of the market during only the very best days or the very best months of some longer period, your performance would greatly underperform just buying and holding the overall market. At first glance this seems self evident.

However, what is not fair about these statements is the discounting of the idea of avoiding the WORST market days or months! You cannot just view the idea of missing out on the best days of the market, unless you offset this view by factoring in the results by missing out on the worst days or months of the market on an equal basis.

Missing the worst periods has profound impact on long-run compounding. The Plain Truth is that it is more important to avoid the worst days or months , than it is to participate in the best days or months!

This all comes about because stock prices go down faster than they go up. Wall Street and most people tend to overlook the value of minimizing losses, and that is exactly why the recent Bear Market demolished more than 50% of many peoples' portfolios while those who trusted in a systematic system such as is practiced by Lussenheide Capital Management Inc. escaped the worst of the bear's rampage.

In a study commissioned by Towneley Capital Management Inc. and conducted by Professor H. Nejat Seyhun, of the University of Michigan, the following chart shows returns when excluding both worse and best months (and combinations thereof) . The individual who missed both the best and the worst 48 months of the market in the 68 year period studied, would have actually made more than the Buy & Holder. In addition, (and perhaps this is the most important factor), he would have achieved this with much lower risk, with a reduction of Standard Deviation (a risk measurement) by more than 33% from 19.3 for buy & hold, to just 11.6 for the portfolio that missed both the 48 best and worst stock market months.

A One Dollar investment in January 1926 to December 1993, became $637.30 for the buy & holder, whereas the investor missing both the best and worst 48 months would have ended up with $1080.90 an increase of 69.6%! As good Investment Warriors always remember that the best offense is always to have the best defense when it comes to investments!

Returns excluding extreme monthly observations
for period January 1926 to December 1993 (68 years)

Condition	Number of Months	Average Annual Return on Index	Standard Deviation of Returns	Average Annual Return on T-Bills	Cumulative Return on Index
All months	816	12.02%	19.30%	3.48%	637.3
Exclude best 1 month Exclude best 2 months Exclude best 3 " Exclude best 6 " Exclude best 12 " Exclude best 24 " Exclude best 36" Exclude best 48 "	815 814 813 810 804 792 780 768	11.41 10.84 10.31 9.36 8.07 5.97 4.31 2.86	18.90 18.37 17.96 17.50 17.09 16.58 16.28 16.08	3.48 3.49 3.49 3.49 3.51 3.49 3.50 3.51	460.6 337.2 253.1 144.7 65.0 16.9 5.3 1.6
Exclude worst 1 month Exclude worst 2 months Exclude worst 3 " Exclude worst 6 Exclude worst 12 Exclude worst 24 Exclude worst 36 " Exclude worst 48	815 814 813 810 804 792 780 768	12.51 12.92 13.30 14.40 15.99 18.69 20.96 23.00	19.05 18.83 18.62 18.08 17.51 16.77 16.27 15.91	3.48 3.49 3.49 3.49 3.51 3.50 3.52 3.51	898.0 1,176.1 1,516.1 3,052.1 7,850.1 34,233.9 106,522.9 270,592.8
Exclude best & worst 1 Exclude best & worst 2 Exclude best & worst 3 Exclude best & worst 6 Exclude best & worst 12 Exclude best & worst 24 Exclude best & worst 36 Exclude best & worst 48	814 812 810 804 792 768 744 720	11.90 11.72 11.58 11.69 11.92 12.32 12.73 13.10	18.51 17.78 17.13 16.04 14.93 13.39 12.37 11.60	3.49 3.49 3.50 3.51 3.55 3.51 3.54 3.55	649.2 622.7 603.0 696.0 810.3 958.1 1,051.6 1,080.9

The value-weighted index of NYSE, AMEX, and NASDAQ stocks is used to measure the market returns. All returns and standard deviations are annualized by compounding the arithmetic average of monthly returns.

Cumulative return measures the holding period dollar returns to $1 invested at the beginning of the period. Hence, the cumulative return of 637.3 means that $1 grows to $638.30 if invested continuously from January 1, 1926 to December 31, 1993.

"Permission to use this study was given by Towneley Capital Management, Inc. For complete text of study see http://www.towneley.com/star.pl5?page=study "

NOW MORE THAN EVER, REMEMBER AND COMMIT TO STRATEGY, PATIENCE, & DISCIPLINE!