Business

In the Stock Market, Don’t Buy and Sell. Just Hold.


Selling all of your stock just before the market falls, and buying shares just before the market rises, is a brilliant strategy.

If you could really do it, you would have bragging rights among your friends. And if you could repeat the feat over and over again, you would be fabulously rich — a true stock market wizard.

But the ability to trade like that is rare, if it exists at all. Without question, it’s so hard that the vast majority of professional traders can’t do it, as countless studies have shown.

I certainly can’t. Most of us are better off living with the reality that the stock market moves down as well as up, and that we can’t beat it. A new study provides fresh evidence of why it makes sense to strive for an absolutely middling return. And the study implies that a simple, unspectacular strategy — buying and holding the entire market through low-cost index funds — is probably the best bet for most people.

A blog about the new research begins provocatively. Its title is suggestive: “We Found 30 Timing Strategies That ‘Worked’ — and 690 That Didn’t.”

Most strategies didn’t work: That’s not surprising. But what about those that did? I wanted to find out. Perhaps they contained the secret to future riches and I could share it with the world.

Alas, no.

I quickly found that there was no secret, just luck, as the researchers readily acknowledged.

“Eventually, if you flip a coin enough times, somebody will get heads 10 times in a row,” Wei Dai, head of investment research at the asset management firm Dimensional Fund Advisors, told me from Singapore in a video conversation. “Flipping a coin is just chance,” she said. “The strategies that ‘worked’ were like that.”

Audrey Dong, a senior associate at Dimensional, participated in the research with Ms. Dai.

The two analysts came up with a comprehensive, though not exhaustive, array of market timing strategies — 720 in total, conducted on a variety of stock markets and using a broad range of rigorously applied timing signals.

All of this was a little wonky. They worked carefully and methodically. The signals included several stock valuation measures, market momentum (whether stocks were rising and falling) and whether small or large capitalization stocks were performing well. The researchers applied these measures to a range of time periods.

The strategy that appeared to work best was conducted in a variety of developed country stock markets outside the United States from 2001 to 2002.

It beat a simple buy-and-hold approach in these markets by an annualized 5.5 percent, seemingly a remarkable achievement. And it managed to do this with a straightforward method — abandoning stocks and buying safe Treasury bills when the stock markets were overvalued.

As the blog said, in a teasing, celebratory tone: “Thanks to the decision to sit on Treasury bills during market downturns in 2001, 2008 and 2022, the strategy outperformed the buy-and-hold market portfolio.”

But, the blog quickly added, don’t get “too excited.” This strategy used extremely specific measures chosen in a computerized “backtest.” Alter a single one of them and it no longer outperformed the markets reliably, even retrospectively; it didn’t work in multiple markets; and there’s no particular reason to assume that it would work dependably in real time now. In fact, there was a flaw in every one of the 720 approaches the researchers took, including those that seemed superficially superior.

What’s more, even if one strategy managed to work for a while, it would be unlikely to remain secret for long. Modern markets are efficient enough that a winning method will be quickly replicated by others, and won’t be winning for long.

That’s one of the core insights of what is known as “passive investing”: simply accepting that you can’t beat the overall market and focusing instead on minimizing your costs so you can get as much market return as possible. Broad, diversified, low-fee index funds — either traditional mutual funds or exchange-traded funds — will do this for you. But you need to be willing and able to withstand substantial losses, sometimes for extended periods, because while the stock market has risen over the long haul, it often declines.

Timing the market is, for the vast majority of us, a recipe for losses. It may work some of the time, but it’s unlikely to work all of the time. The problem isn’t just knowing when to sell. You also need to know when to get back into the market, and getting both decisions right — selling at a peak and buying at a trough — is rare in any single market cycle. Over decades, it may be impossible.

“This is an eternal topic,” Ms. Dai said. “People are always trying to figure out ways of beating the market. But moving in and out of stocks isn’t a good way to do it.”

What this Dimensional research didn’t investigate was whether picking individual stocks can be a consistently winning strategy. But other studies have demonstrated that successful stock-picking over long periods is also extremely rare.

For instance, a long-running series of reports by S&P Dow Jones Indices — which I have covered in this column — have examined the overall performance of stock funds and found them generally to be lacking. Most active fund managers can’t beat the market year after year, these reports have shown.

I’d be happier knowing a way of beating the market regularly, of course. I’d rather be a stellar performer, not an average one.

But, as it turns out, striving to be average is probably a wise choice. Just match the market returns; don’t try to beat the market by buying and selling at moments that seem like great opportunities. You’re likely to hurt yourself.

That’s the implication of the Dimensional study and a central message of a classic investing book, “Winning the Loser’s Game,” by Charles D. Ellis. As in amateur tennis, avoiding errors is likely to improve your performance more than reaching for big winners. Consistency and efficiency — low cost and diversification, in the case of investing — is the best approach for most of us.

This isn’t an inspiring message, perhaps. There’s no particular glory in merely matching market returns and avoiding dumb unforced errors.

Yet this approach isn’t easy, either. You need to stay solidly in the middle of the pack and keep your expenses low, while most of Wall Street tempts you with advice on how to get ahead of everybody else.

That advice comes at a substantial cost, however. This latest study, along with much of academic finance, suggests that for most investors, striving to be average is a much better bet.



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