I know market timing is considered a bad word in investing, but like it or not it matters. Below are screen shots from a the blog The Fat Pitch by Urban Carmel and his article titled When “Buy and Hold” Works, and When it Doesn’t.” He performed a study of long term time periods using real S&P (inflation adjusted) and below are some of his findings as described in his article and graphs.
The above is reflective of 30 year time periods and you can see that there are many instances where the real S&P was lower than a peak 30 years prior. He goes on to show in his next graph for 10 and 20 year periods as shown below.
This, in my opinion, is why value investing can be so powerful. Value investing looks at purchasing a business when it is at a fair or good price. Most value investors don’t care about the market. When a market is on a down cycle many businesses become inexpensive, and when value investing gets active. There are always values at any time in a business cycle, but there are usually more value opportunities in a market down cycle.
I consider Warren Buffett, as an example, a business investor timer. Buffett doesn’t care about the stock market. The stock market is a tool that he uses to make investments in businesses that he likes. Often in market up cycles he’ll be sitting on a lot of cash. In market down cycles he’s out cutting deals. Capitalism at its finest, but definitely waiting for the right time.
What concerns me about this study is indexing. If you invest and purchase the S&P index at the incorrect time you could be waiting a long time to get back to even. A good way to combat this would be to diversify your indexing to include international and fixed income indexes, so you have varied exposures, and reinvesting the dividends should help as well.