Is market timing a better investment strategy than buy and hold? This question has come up again and again in the investment community and although there are many opinions, the best way to answer the question is with some real data. To this end the Towneley Capital Management Investment Group commissioned a study to determine which method produced better total return values over time.

The Townely Group asked Dr. H. Nejat Seyhun, Professor of Finance and chairman of the Finance Department at the University of Michigan to perform a comprehensive study looking at market data during 1926-1993 and 1963-1993. The results clearly show that Buy and Hold produces higher returns over time than market timing. Here are a few highlights of the study:

• From 1926-1993, a capitalization weighted index of U.S. stocks gained an average of 12.02% annually. An initial investment of $1.00 in 1926 would have earned a cumulative $637.30. If an investor missed the market's best 12 of the 816 months, the annual return falls to 8.07% and the cumulative earnings to $65.00. Missing the best 48 months, or 5.9% of all months, reduces the annual return to 2.86% and the cumulative gain to $1.60.
  
  Avoiding months when the market plummets can, of course, greatly improve performance. Excluding the single worst month raises the average annual return to 12.51% and the cumulative return to $898.00. Eliminating the 48 worst months lifts the annual return to 23.0% and the cumulative amount to $270,592.80.
  
  
• For the 1963-1993 time frame, the findings were similar. The index gained at an average annual rate of 11.83%, for a cumulative return on $1.00 of $23.30 over 31 years. If the best 90 trading days, or 1.2% of the 7,802 trading days, are set aside, the annual return tumbles to 3.28% and the cumulative gain falls to $1.10. If the 10 worst days are eliminated, the annual return jumps to 14.06%, and the cumulative return increases to $44.80. With the 90 worst days out, the annual return rises to 21.72% and the cumulative gain to $325.40.
  
  
• In the 1926-1993 period, missing the best 5.9% of the months (a total of 48 months) would have created exposure to 83% of the risk of continuous stock market investing, but the average annual return would have been 19% less than the return on Treasury bills.
  
  
• In the 1963-1993 span, missing the best 0.8% of the days (a total of 60 days in all) created an exposure to 94% of the risk of continuous stock market investing. In this situation, the average annual return would have been 11% less than that of Treasury bills.
  
  Clearly, if you want to beat a buy and hold strategy with market timing, you'd better have a good crystal ball!