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Step 4: Time Pickers

be accurate 74% of the time in order to outperform a passive portfolio at a comparable level of risk. In 1992, SEI Corporation updated Sharpe’s study to include the average 9.4% stock market return from the period 1901-1990. This study determined that gurus must be right at least 69% and as high as 91% of the time.62 What percentage of times do market timing gurus get it right? CXO Advisory Group tracks public forecasts of selfproclaimed market-timing gurus and rates their accuracy by assigning grades as “correct,” “incorrect” or “indecisive.” Figure 4-1 depicts CXO’s percentage grades for 28 well-known markettiming gurus who made a collective 4,629 forecasts from 2000 2012. The study shows that not one of the self-proclaimed gurus was able to meet Sharpe’s requirement of 74% accuracy, or SEI’s minimum 69%, thereby failing to deliver accuracy sufficient to beat a simple index portfolio.63 At first glance, the 10 gurus who had percentage accuracy of more than 50% might look appealing. But beware, the opportunity costs associated with being in cash before markets rise creates a higher hurdle that can only be made up by being in cash before markets go down. Transaction costs, taxes and mistakes associated with market timing add hurdles for market timers to just break even. In The Big Investment Lie,64 Michael Edesess explains why market timing is so difficult, “The stock market can turn on a dime and always does. Prices are constantly twisting and turning without trend or predictable pattern. Their recent movement gives you nothing to go on.”

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

Index Funds: The 12-Step Recovery Program for Active Investors  

This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...