You've finally done it; you've correctly timed the market. Let all those who doubted you wait in line as you autograph hypothetical portfolios and Morningstar reports.
For the average investor, correctly timing the market may be the Holy Grail. However, you may still be wondering why your portfolio returns are far from exceptional.
According to the Dalbar's 2015 Annual Quantitative Analysis of Investor Behavior (QAIB) the average equity fund investor correctly timed the market in eight out of 12 months in 2014. This 67% success rate may give an investor, or advisor for that matter, a false sense of victory.
Eight wins in 12 games is a record the hapless Miami Dolphins would be proud of, but for the average investor in 2014, this ratio would underperform the S&P 500 by more than eight percentage points (5.50% vs. 13.69%).
If I'm getting it right, why am I underperforming?
According to Dalbar's QAIB, the average equity fund investor timed the market correctly 67% of the time but underperformed overall based on the volume of buying and selling at the right times. In short, when you get it wrong, you get it very wrong.
A Prudential article on market timing has a great example on how getting it wrong, even some of the time, can drastically alter your portfolios overall return. According to Prudential, an investor who was fully invested in the S&P 500 from January 1995 to December 2015 would have had an annualized return of 8.19%.