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Market timing vs buy and hold


Guest kawikaho
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Guest kawikaho

I read an interesting paper regarding a market timing strategy that out performed buying and holding the S&P from 1970 to 2000.  In this time, the market timing strategy outperformed the S&P by over 2x's.  Sounds interesting, right?  This paper was written by an economist working at the Federal Reserve in Kansas.  Anyways, it was interesting to me that above all things, he considered transaction costs to be trading fees only.  Reviewing the paper, I realized that no tax consequences were implemented, so I did my own analysis and discovered that the tax implications were quite high, and negated any out performance and led to drastic under performance!  In a somewhat optimistic scenario, they were both even.  The biggest advantage the timing strategy had was in tax sheltered accounts, like IRAs or RRSP's.  Might be helpful for you guys with large RRSP accounts.

 

 

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Guest kawikaho

http://www.kansascityfed.org/publicat/reswkpap/pdf/rwp02-01.pdf

 

Remember, only in a RRSP or 401k account.  I did an analysis that compared the cost of trading in and out of the markets the way this approach did and the tax costs, assuming 30% at the state and federal level, negated the returns to 30 fold vs. 101, and below the buy and hold of 47 fold. 

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