Timing the Market – How would I have done if I followed it since I graduated?

Back at the beginning of the month (Aug 5th) I wrote about Stein & DeMuth’s use of long-term metrics and trends to “time the market” in the long term (i.e. over a 10-15+ year period). Unfortunately, their book was published in 2003, and while they kept graphs up on their website (   ) for a while, they stopped updating the graphs in 2015.

I wanted to do a “what if” analysis, where if I had followed their metric strategy from when I first graduated and started investing some of my salary (1987) to the end of 2016, a 30 year period. I would take $1,000 a year and invest it either in the S&P 500 every year (dollar cost averaging) or the S&P or AAA bonds, based on the “market timing” signal that Stein & DeMuth laid out:

  1. S&P 500 price vs. 15-year average (if above average, don’t buy)
  2. S&P500 P/E vs. 15-year average (if above average, don’t buy)
  3. S&P500 Dividend yield vs. 15-year average (if above average, don’t buy)
  4. S&P500 Earnings yield vs. AAA bond average (if bond yield is higher, go with bonds, not stocks)

Base Strategy

  • Whenever I got a “buy” for S&P 500, I put in $1,000 at the beginning of the year
  • Whenever I got a “don’t buy” I put in $1,000 in the average for AAA bonds
  • I adjusted for inflation
  • I ran the numbers for each of the 4 scenarios, for the 30 year period, including the great run up of stocks in the 90s, the dotcom crash, the low bond rates of the 00s, and the crash of 2008.

The results were very interesting.

  • Dollar cost averaging into S&P500: $60,691
  • Price metic: $65,576 (8.0% better return)
  • P/E metric: $67,583 (11.4% better return)
  • Yield metric: $67,133 (10.6% better return)
  • Earnings vs bonds: $66,034 (8.8% better return)

What this shows me is that, if you have the patience and long-term outlook necessary, using the metrics outlined by Stein & DeMuth appears to offer slightly better returns. In their book , they showed higher returns (20%), but that could simply have been the timing of the book – right after the dot.com crash.

I will probably continue dollar-cost averaging in my 401K and Roth IRAs across a spectrum of investments with my allocation. I will also probably use some of this timing strategy with my “funny money.” I’ll let you know how I’m doing.

Anybody out there with an interesting market timing strategy?


Mr. 39 months

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