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Looking at the Evidence

To examine the myths about market timing, you have to look at history. Organized equity markets in the United States have been around for more than a century and it is not surprising that much of the work done on market timing is based upon looking at their performance. This section looks at how stocks have done, relative to alternative investments over very long periods. It follows up by looking at whether the indicators that purport to time markets and the investors who claim to be market timers actually are successful.

Do Stocks Always Win in the Long Term?

Consider what all investors are told about investing in stocks. If you have a short time horizon, say, a year or less, stocks will generate higher expected returns but they are also far riskier than bonds. The risk implies that stocks can do much worse than bonds during the period. If you have a longer time horizon, stocks supposedly become less risky; you can have a bad year in which stocks do badly but there will be good years in which they more than compensate. Over these longer time horizons, you will be told that stocks almost always do better than less risky alternatives.


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