Bridge over ocean
1 September 1987 Financial Analysts Journal Volume 43, Issue 5

Potential Gains from Stock Market Timing in Canada

  1. Jess H. Chua
  2. Richard S. Woodward
  3. Eric C. To

Historical data indicate that an investor switching between Canadian common stock and Treasury bills can expect significant gains relative to a buy-and-hold strategy—if the investor has perfect foresight. A series of Monte Carlo simulations using different combinations of bull and bear market forecasting accuracies provides some estimates of the gains from less-than-perfect forecasts. These results are much less sanguine. In fact, the forecasting accuracies necessary to achieve consistent positive gains are probably beyond the reach of most managers: Successful timing between the two markets requires a minimum accuracy of 80 per cent in forecasting both bull and bear markets.

Accuracy in forecasting bull markets is the variable deciding whether timing will pay off. The returns that give the stock market its high average return tend to occur infrequently and over a proportionately small number of periods. A buy-and-hold strategy in effect has 100 per cent accuracy in forecasting bull markets and zero accuracy in forecasting bear markets. A less-than-perfect timing strategy increases the investor’s chance of avoiding bear markets, but at the expense of lowering his chance of hitting the more important bull markets.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.