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Chapter 7. Timing the Market > Timing in Bull and Bear Markets

Timing in Bull and Bear Markets

To some extent, it may be unfair to expect market timers to outperform the S&P 500 Index during a bull market. If market timers spend periods of a bull market out of stocks, it is very likely that they will underperform the buy-and-hold strategy. Given the great bull market of the 1990s, we should expect timers to have done poorly. However, the real value of market timing to some investors is not to outperform a bull market, but rather to avoid the catastrophe of a bear market.

The bull market of the 1990s ran out of steam in 2000. During 2000, the S&P 500 Index earned a –10.1% return. How did market timers do in this environment? One newsletter, America's Best Timers, tracked the performance of 146 market timers.[11] It was rare for timers to beat the index during the great bull market of 1997 to 1999. However, America's Best reports that only 42% of those market timers beat the S&P 500 Index in the down market of 2000. This is certainly not the kind of performance we hope will help us to avoid the ravages of a bear market. In fact, 2000 was a bit of an odd year in that Morningstar reported that 69% of the stock mutual funds beat the S&P 500 Index. It appears that the market timers beat neither the index nor the equity mutual funds during the very time we would want timing to work—a bear market.


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