re: Timing the market

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Well that is certainly not a fair strategy, and you've got the benefit of hindsight to help make your decisions. Any technical strategy such as this should have a set number where you move into and out of the market. 

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Yes I agree, and I noted in many of my posts my lack of precision, but all the Irish whiskey from Saturday was preventing me from being more thorough. If the final numbers weren't so impressive I'd probably dismiss it as pure luck or something of the sort.

But whether I was selling 5% below the trend line or 10% below the trend line I am certain the final outcome would've been similar and the market timing strategy would've handily beat the market, simply because of 1987, 2001, and 2008. You would've gained such an advantage after these years that the previous percentage points would be negligible.

I'm glad you did a more thorough study and have similar results. And it's not surprising seeing the period after 1970 be the tipping point. As said above, the big market crashes since then are the main factors.

Nice find.

Makes you wonder

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isn't the short answer in all this that is-you avoid holding stocks through significant downturns (thereby being able to buy when there is a significant downdraft)

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Yes, that is the idea and sounds simple.

But this

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you will always beat a buy and hold strategy. thus, simply pick a sell point that limits downside losses.

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is not true. If it were that easy everybody would do it and be successful. The problem is determining a good sell point. There is simply no way to tell if the trend will continue down.

Many times you could sell, and the price could immediately change directions, causing you to miss out on some gains. Which happened quite often when I was doing this particular experiment. In that case, the buy and hold strategy would outperform the timing strategy.

The timing strategy only beats the buy and hold strategy on severe market downturns, which is why it is a long term strategy.

Right, but the issue is that in your control you're making a single purchase and never buying or selling stock again. (if I understand correct). So you aren't getting the DCA advantage of buying in during the bear markets. This is why it looks like buy and hold is underperforming - a person following your rule would never be buying in at dips. So this rule holds true only if you have one lump sum to invest, once, and then never again.

Obviously factoring in additional purchases would make the calculation about 100x more difficult.

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Did you take into account bid/ask spread and commissions or transaction fees? 

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Bid/ask spreads are so close on highly traded securities it would make very little difference.

As for transaction fees, as I've said earlier in this thread, using this strategy you would've only jumped in and out of the market about 20 times in 40 years. Transaction fees would be neglible with this amount of money.

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Did you take into account bid/ask spread and commissions or transaction fees?

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No, but let's assume you traded SPY on Charles Schwab @ $8.95 per trade, you would have bought in once under each strategy @ $8.95. Under the timing strategy, you would bought or sold another 62 times over the period, for an additional $554.90 in commissions. That sum is inconsequential.

Also, if you annualize the returns, the timing strategy would have returned 9.23% compared to the 7.28% for the buy-and-hold strategy. That goofy little ~2% annually ends up costing you over 2 million dollars over the 63 years of data.

Just look at the S&P 500 from as far back as it will go and affix a moving average line to it. I used a 50 week moving average, but you could use any time-frame you like.

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Are you using total returns?

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Yes

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Because the power of compounded, reinvested dividends needs to be accounted for in the buy and hold scenario.

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The short amount of time you are out of the market with the market timing strategy (I said earlier in the thread, over the course of the 40 years you only jump out maybe 20 times), the dividends you miss out on would be negligible.

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You also need to account for commission costs and the massive short-term capital gains taxes over the time period.

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Commission costs are also negligible as you are jumping in an out of a the market maybe a couple of times a year. $7.99, or whatever you pay per trade with your broker, would matter very little in the long run, as was discussed earlier in the thread.

And this is assuming a tax free investment vehicle, so capital gains tax can be eliminated.

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Finally, too much of your gains are going to depend on your not participating in the 08/09 bear which could be considered a historical anomaly. How has your strategy performed from the 09 low to present?

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I discussed this in the thread numerous times. The main advantage to the market timing strategy was missing out on the huge crashes in '87, '01, and '08, and reinvesting at a lower price point. I assume measuring just from '09 to present, the buy and hold strategy would outperform. But as I've also said earlier in the thread, the market timing strategy only outperforms over the long haul (20-40 years), when market crashes and bear markets are inevitable. There are plenty of short time-frames where buy and hold outperforms the market timing strategy, but over the long haul it wasn't even close.

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Right, but that's today. What do the assumed commissions look like over the life of your dataset? Discount brokers are a relatively new phenomenon.

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I'm not trying to be snarky when I say this, but did you look at the difference in performance? Unless you are paying thousands of dollars per trade, commission fees have such an inconsequential effect on the final outcome that they can be ignored.

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Which tax free investment vehicle are people assumed to be using from 1974 through the end of your dataset?

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I don't know what investment vehicles were around in the 70's, but IRA's were around as early as 1986. If we started the experiment from then, the final outcome would have a similar result.

Regardless, they are available today, as are low commission trades. This was an experiment looking at the past to develop a trading strategy for today. The basic premise of avoiding market crashes and bear markets, which makes market timing advantageous, will hold true as long as market crashes and bear markets resume, which I assume they will. If they don't, then everyone will be happy regardless.