Set forth below is the text of a comment that I put today to the Free Money Finance blog:
I am grateful to you for running this post, FMF. I believe that the question of whether market timing works or not is the most important question in personal finance today. I know that you do not personally support market timing, FMF. By presenting posts on it, you are helping people sort through the questions. That is a big deal and a big help.
You are making a mistake that I have seen Buy-and-Holders make thousands of times, Michael. You are confusing short-term timing with long-term timing. You present strong evidence that short-term timing doesn’t work. The research has been showing this for 40 years now. So I don’t view this as being much of a biggie. You are presenting no case whatsoever that long-term timing does not work. That’s what people need to learn about. That’s the “controversy” (I put the word in quotes because there is no real controversy here — there is a mountain of evidence showing that long-term timing always works and that short-term timing never works.)
The key to understanding what is going on is appreciating why short-term timing is so different from long-term timing. In the short-term, stock prices are determined by investor emotion. For short-term timing to work, you would need to know in advance which way investor emotion is headed. Emotion is by definition highly irrational. So how the heck can anyone make effective guesses?
Long-term prices are determined by the economic realities. The economic realities are highly predictable. The U.S. economy has been sufficiently productive to support a long-term average return of 6.5 percent real for as far back as we have records (1870). So long as that remains even roughly so, long-term timing will continue to work. It’s not even possible for the rational human mind to imagine a circumstance in which long-term timing would not work, unless we see a collapse of the market (in which case we would be better off not to invest in stocks at all).
We very much need a national debate on Shiller’s 1981(!) finding that long-term timing always works. Having that debate is the key to bringing the economic crisis (brought on by the reckless promotion of Buy-and-Hold strategies) to an end. The key to getting that debate off on the right foot is being careful to distinguish the short-term and long-term varieties of market timing.
Yes, there is one form of timing that never works and that’s an important insight that is properly credited to the Buy-and-Holders. But, no, the finding that short-term timing doesn’t work in no way, shape or form lends support to the idea that timing doesn’t work. Long-term timing is critical to long-term investing success. There has never yet been a time in history when Buy-and-Hold worked in the long-term. We will never see such a time. Failing to time the market is failing to take price into consideration when buying stocks and that cannot possibly be a good idea.