Market Timing and Its Costs
Why attempts to time the market have historically cost investors more than they gained, illustrated with specific data on missed best days.
Siegel presents extensive data on the practical cost of attempting to time entry and exit from the market rather than simply staying invested — a theme this Book Club's A Random Walk Down Wall Street course also covers, and Siegel's historical dataset lets him make the same point with an even longer data span. His calculations show that a large share of the market's total long-run return is concentrated in a relatively small number of individual trading days, and that an investor who is out of the market for even a handful of the best days over a multi-decade period substantially underperforms one who simply remained invested throughout, even if that second investor experienced every single downturn along the way.
The book's explanation for why this happens isn't mysterious — market timing requires being right twice (correctly identifying both when to sell and when to buy back in), and the very best days historically have tended to cluster close to the worst days, often during periods of extreme volatility right around a market bottom, which is precisely when a fearful, timing-minded investor is most likely to already be out of the market and least likely to buy back in.
Siegel's data shows that missing even a small handful of the market's best individual days over a multi-decade span meaningfully reduces total long-run return — and those best days cluster near the worst ones, making them very hard to time around in practice.
The clustering of a market's best and worst days close together isn't a coincidence — both tend to occur during periods of unusually high volatility, often around the same market stress event, since extreme volatility itself, not direction, is what produces both the sharpest declines and the sharpest snapback rallies. This is precisely why market timing is so much harder in practice than in hindsight: the same volatility that makes an investor want to exit is the volatility that produces the outsized recovery days that investor then risks missing.
- A large share of the market's total long-run return is concentrated in a small number of individual days.
- Missing even a handful of those best days over a multi-decade period substantially reduces long-run returns compared to staying fully invested.
- The market's best and worst days cluster together during periods of extreme volatility, which is exactly why market timing is so much harder in practice than it appears in hindsight.