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Notices
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1 January 2001 Financial Analysts Journal Volume 57, Issue 1

Market Timing and Roulette Wheels

Richard J. Bauer and Julie R. Dahlquist

Nobel laureate William F. Sharpe and others have alerted investors to the potential pitfalls of market timing. We also conclude from the study reported here that market timing is generally a difficult game. But the difficulty varies substantially over time-which has some intriguing implications for performance evaluation. Using a new measure of investment performance that we call the “roulette wheel” measure, we analyzed monthly, quarterly, and annual market-timing strategies in the 1926–99 period for six major U.S. asset classes. In the 1995–99 period, buying and holding large-capitalization stocks would have outperformed about 99.8 percent of the more than 1 million possible quarterly switching sequences between large-cap stocks and U.S. T-bills. In 1994, however, if 1,000 portfolio managers had made monthly random choices between large-cap stocks and T-bills, about 591 of them would probably have beaten a buy-and-hold strategy. If 650 of the 1,000 had beaten a buy-and-hold strategy, should all 650 have earned a bonus?

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