Sometimes looking at the raw data itself presents very interesting conclusions. This is one of these cases.
One of the basic mistakes many investors do is trying to time the market or buy low and sell high to make quick profits. If you’ve ever tried that you must have noticed it’s hardly as intuitive as it sounds. It appears the statistics themselves are against us in this matter.
In order to see if it was possible to time the market and make relatively quick profits I’ve examined the daily price change for both the Nasdaq and S&P 500 indices since 1990. I’ve found very interesting results. I exmained the absolute daily price changes and not just the positive ones under the assumption you can also time the market downwards (sell short).
There were approximately 4,559 trading days between January 1st 1990 and February 2nd 2008. Only 51 of these days yielded a price change of over 5% in the Nasdaq, and a mere 8 days in the S&P. Maybe 5% is too much to ask for? If we suffice with 3% the numbers change to 238 days for the Nasdaq’s and 59 days for the S&P.
What are our chances of catching such days? Very basic statistics quickly determines we have a 1.1% chance of catching a 5% price shift and 5.2% chance of catching a 3% price shift in the Nasdaq. The S&P’s statistics are even “worse” 0.2% chance of a 5% price shift and 1.3% chance of a 3% price shift.
The long tail or 80/20 principle work here as well. The number are a little different but the principle remains. The majority of days will end in price shifts of under 1% or 1%-3%. That is the long tail of trading days or the “80%”.
We already know timing the market is impossible. What other important lessons are here to learn? It seems the only way to enjoy price bursts in the stock market is to constantly be there. In other words – Invest for the long term. If you’ve bought the Nasdaq Index in 1990 your chances of enjoying 5% price shifts have been 100%.
Succecful investors have long term goals and targets. Timing the market is better left to professionals who do that for a living.
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