In finance, a “black swan” refers to a large-impact, hard-to-predict, rare event beyond the realm of normal expectations. The stock market crash of October 19, 1987, when the Dow fell 23 percent in one day, would be an example; another would be the “flash crash” of May 2010. Larry Swedroe, author of Investment Mistakes Even Smart Investors Make, argues convincingly that if investors could avoid the effects of black swans, the impact on investment returns would be enormous.

Consider the following: A study by Javier Estrada, “Black Swans and Market Timing,” on 15 developed country stock markets, including the U.S., found that if investors could avoid the worst 10 days their returns would be 150 percent more than the returns of buy and hold investors. This makes market timing a tempting strategy. However, before being tempted, consider these words of wisdom from legendary investor Peter Lynch: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” By examining the evidence from studies on market timing we can see whether or not the belief in market timing efforts have been rewarded.

We begin by looking at the results of a study on market timing “experts.” Mark Hulbert, publisher of Hulbert’s Financial Digest, studied the performance of 32 of the portfolios of market timing newsletters for the 10 years ending in 1997. During this period, the S&P 500 Index was up more than 18 percent per year. Here is what he found:

  • The timers’ annual average returns ranged from 5.8 percent to 16.9 percent.
  • The average return was 10.1 percent.
  • None of the market timers beat the market.

MoniResearch studied the performance of 85 managers with a total of $10 billion under management. Here is what they found:

  • The timers’ annual average return ranged from 4.4 percent to 16.9 percent.
  • The average return was 11.04 percent.
  • None of the market timers beat the market.

Warren Buffett stated: “Our stay-put behavior reflects our view the stock market serves as a relocation center at which money is moved from the active to the patient.” Buffett understood that investors do not earn returns smoothly over time. Instead, they earn them largely as a result of unpredictable bursts and crashes. Given that so much of the action happens on such a small number of days, the odds of successfully predicting the days to be in and out of the markets are close to zero. The real danger for investors is not being there when the big up moves occur.

You can avoid the mistake of trying to time the market by developing an investment policy statement and having the discipline to ignore forecasts that have no value, other than possibly for entertainment. As Woody Allen said: “Most of success in life is in just showing up.”