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Why Market Timing is Hazardous for Returns

By: Riz L. Jao
 
The year 2016 turned out to be a roller-coaster ride for the Philippine stock market. After a disappointing start by dropping 2.13 percent at the end of January, the index managed to regain its footing and entered an uptrend in the first half that culminated with increasing by 14.09 percent year-to-date (YTD) at the end of June. By July 21, it came within a breath of its all-time high of 8,127.48 (posted in April 10, 2015) closing at 8,102.30 (up 18.57 percent YTD) before losing a bit of ground, but ultimately retesting that 8,100 level the week after closing at 8,100.48 on July 27. Since then, however, the Philippine Stock Exchange index (PSEi) has entered a downtrend virtually giving back all the gains of 2016 closing the year at 6,840.64 (up just 0.11 percent).
 
All this activity has brought about the resurgence of such advice, like “buy the dips and sell the rallies”. While this is good advice, the stock market has a few properties that make this advice the financial equivalent of “eat more fruits and vegetables” (i.e., we understand it but we lose it when cakes and ice cream come our way).
 
Figure 1.1 plots the daily PSEi returns by how likely they have occurred in the last 21 years from 1995 to 2016 and contrasts this with a set of hypothetical normally distributed returns.
 
We can see that the daily stock returns are positively skewed—the data has a skewness of 0.47—this has two key implications for investing. First, there is slightly more observations to the left of the mean of 0.03 percent than to the right, in fact, 51.51 percent of all days saw the PSEi either drop or stay flat. Second, the right tail of the distribution is longer than the left tail, this means there are slightly more positive extreme values (0.09 percent) than there are negative extreme values (0.07 percent). Thus, we shouldn’t lose sleep if the PSEi closes flat or negative for the day, it usually does so, and we should avoid obsessing over the next big crash, as they are extremely rare and our time would be much better spent doing what we love instead.
 
Read the full article at http://www.businessmirror.com.ph/why-market-timing-is-hazardous-for-retu...

1/13/2017