Does market timing work?

Happy New Year everyone! I sure hope everyone had time to relax over the holidays. Boy, the market sure has been volatile the last few weeks! On Christmas Eve, major stock indexes in both Canada and US nosedived. Many media outlets published articles titled something along the line of “Worse Christmas Eve trading day ever,” “The end of the bull,” “Major market plunge,” “The end is near,” etc. Major panic! 

When the US market opened again on the 26th, indexes rose, resulted in one of the best performance days in 2018. When the Canadian market opened on the 27th, it went straight up as well. Although the US market initially nosedived on the 27th, it ended up in the black by the end of the day. Needless to say, it has been quite a wild ride! Given the market volatility, I was not a surprise to receive an email from a reader the other day..

I think the bear market is coming. Isn’t it a far better idea to sell stocks, take in some profit, and wait on the sideline until the bear has ended?

Does market timing work?

I’m sure a lot of people have something similar on their mind lately. It’s a little bit funny because I seem to write this kind of post every so often. For example, back in Dec 2016, I wrote an article titled Should I sell some stocks now and wait for a market correction? In it, I suggested the following:

  1. “I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.” Peter Lynch.
  2. It is impossible to say whether the stock market will continue going up, or when we will see a market correction. Back in 2010, with the financial crisis still fresh in memory, many people avoided the stock market. They kept waiting for another correction before entering the stock market. If they simply kept their cash and stayed on the sideline, they would have missed the second-longest bull market in history.
  3. Rather than looking at the current stock price and evaluate them purely using PE ratio. We should examine our portfolio holding using parameters like Graham’s Number, Chowder Rule, PEG ratio, and Return on Equity (ROE). Perhaps using these parameters will show that dividend stocks in our portfolio are not overvalued. Note: I have been using Simple Wall St for stock analysis, which I found extremely useful. It would also be a good idea to keep a dividend scorecard. 
  4.  Having recession-proof stocks may limit the impact of a market correction. Stocks like Protector & Gamble, Johnson & Johnson, Unilever, and Coca-Cola should offer some hedging against a market correction.
  5. A good percentage of our dividend portfolio consists of financial stocks like Canadian banks, insurance companies, and other financial institutions. Canadian banks seem to have a way to make money regardless of what the economy is doing. Sure, the Canadian housing market is worrisome but it appears that many banks have limited their exposures to Canadian housing mortgages. With more interest rate hikes coming, insurance companies should benefit (insurance companies buy bonds to protect their investments). Lastly, companies like Visa will continue to make money as long as people use credits. Therefore, I am not at all worried about our exposure to financial stocks.

I strongly believe these points still stand today. However, being an Excel nerd, I thought it would be very interesting and a fun exercise to run some analysis using historical numbers and see if I could answer this reader’s question.


Some Background Info

For the analysis, I decided to use historical data from 2000 to 2018, or 18 years worth of data. I figured this was a long enough duration because during this time, there were 2 bear markets and 2 bull markets. As a dividend growth investor, I thought it would be interesting to run the analysis on one of the top Canadian dividend stocks – Royal Bank.

After completed the initial analysis and saw some very interesting results, the index ETF investor in me thought I should run the same analysis on an index ETF. So I picked Vanguard Total Stock Market Index, VTI. The idea was to see whether I would get the similar results as Royal Bank.


  1. Historical price data and dividends/distributions were pulled from Yahoo Finance. I calculated the daily averages using the daily highs and lows. I then used the daily averages as the purhcase prices. 
  2. Full shares (i.e. no fractional shares) that added up to $5,000 or closest to $5,000 were invested every year. 
  3. VTI started trading on June 15, 2001, so the investment duration was 1.5 years shorter compared to Royal Bank.
  4. I did the analysis before VTI’s last distribution on Dec 28. I didn’t go back to update the analysis (this shouldn’t really change the results that much anyway).

The Analysis with 5 Different Scenarios

With the background info in mind, here are 5 scenarios I came up with.

Scenario 1

For scenario 1, I assumed that the trader bought shares on the 1st trading day of the year from 2000 to 2018. Dividends received were not reinvested.

Scenario 2

For scenario 2, again, I assumed that the trader bought shares on the 1st trading day of the year. The trader was spooked by what was happening in 2007 and decided to sell all of her stocks on the last day of 2007. When the trader sold all the stocks at the end of 2007, she did not touch any of the money. She then continued to save $5,000 per year. On the first day of 2009, she deployed a total of $10,000 plus the money from the stock sale to get back in the market. Essentially she sat on the sideline for 1 year. Dividends received were not reinvested except when she re-entered the market in 2009.

Scenario 3

Scenario 3 was somewhat similar to scenario 2 with a different timeline. The trader sold all of her stocks on the first day of 2007 then re-entered the market on the first day of 2010. She continued to save $5,000 per year while she was sitting on the sideline for 3 years. Dividends were not reinvested except when she re-entered the market in 2010.

Scenario 4

For scenario 4, the trader sold all of her stocks on the first day of 2006, then re-entered the market on the first day of 2011. She continued to save $5,000 per year while she was sitting on the sideline for 5 years. Dividends were not reinvested except when she re-entered the market in 2011.

Scenario 5

Scenario 5 was similar to scenario 1 where the trader stayed in the market from 2000 to 2018 (or 2001 to 2018 for VTI). The trader enrolled in the dividend reinvestment plan (DRIP) and purchased full shares on the dividend/distribution payment date.


Results – Royal Bank

After running analysis for all 5 scenarios, below are the results for Royal Bank.

Scenarios # Shares Book Value Book Price Dividends  Market Value Portfolio Total (inc div) Profit
1 2305 $94,564.71 $41.03 $67,771.73 $217,338.45 $285,110.18 $190,545.47
2 3150 $134,742.58 $42.78 $78,987.96 $297,013.50 $376,001.46 $241,258.88
3 2339 $138,745.43 $59.32 $53,552.43 $220,544.31 $274,096.74 $135,351.31
4 2178 $123,871.55 $56.87 $46,282.40 $205,363.62 $251,646.02 $127,774.47
5 3692 $184,980.35 $50.10 $92,518.08 $348,118.68 $350,221.12 $165,240.77

Interestingly, if the trader just continued investing and DRIPing for 18 years, she would end up with a portfolio (including dividends) with the 2nd highest dollar value out of all 5 scenarios. Now that’s a great demonstration how powerful compound interest and DRIP are!

In scenario 2 where the trader somewhat timed the market correctly, she ended up with a portfolio with the highest dollar value & profit.

It was quite interesting to see a difference of over $100,000 in portfolio total and profit between scenario 2 and 3. All for selling and buying at different times and sitting on the sideline for different durations (1 year vs. 3 years).

If the trader stayed on the sideline for 5 years (i.e. scenario 4) because she was afraid of the double dip like so many financial experts were predicting after the financial crisis, she would have missed a big chunk of potential earnings. She would end up with a portfolio with the lowest dollar value and lowest profit.


Results – VTI

Below are the results for VTI.

Scenarios # Shares Book Value Book Price Dividends  Market Value Portfolio Total (inc div) Profit
1 1340 $89,392.61 $66.71 $23,262.68 $171,841.60 $195,104.28 $105,711.67
2 1820 $103,214.28 $56.71 $27,891.01 $233,396.80 $261,287.81 $158,073.53
3 1513 $100,750.27 $56.87 $21,553.93 $194,027.12 $215,581.05 $114,830.78
4 1297 $95,682.80 $73.77 $17,119.98 $166,327.28 $183,447.26 $87,764.46
5 1600 $112,493.07 $70.31 $26,055.49 $205,184.00 $208,139.03 $95,645.96

In scenario 2, where the trader somewhat timed the market somewhat correctly, she would end up with a portfolio with the highest dollar value and highest profit.

If the trader just continued investing and did not DRIP, she would end up with a portfolio with the 2nd lowest dollar value. However, if she continued investing from 2001 to 2018 and DRIPed during this time, she would increase her performance and end up with a portfolio with the 3rd highest dollar value. 

Just like what we observed with the Royal Bank results, the trader saw a huge portfolio value difference of over $44,0000 between scenario 2 and 3. Similarly, if the trader stayed on the sideline for 5 years because of fear of the market, she would miss out on a lot of money, resulting in a portfolio with the lowest dollar value and the lowest profit.


A few more things to consider

In case you’re wondering, you can find all the data and calculations here. Here are a few more things to note:

  1. For DRIP, I calculated the adjusted cost basis (ACB) by using the following formula: New ACB = (Previous book value + Additional Shares Purchased x Cost Per Share of Additional Shares Received) / Total number of shares. Some people might argue that “DRIP” money is free money, so the money used to purchase the additional DRIP shares shouldn’t be counted in the book price. These people, therefore, may argue that I calculated the profit for scenario 5 incorrectly. I’d have to disagree with that. When you DRIP and get additional shares, you’re using dividends received to buy more shares. Technically you’re “spending money” to buy more shares. So that money needs to go on the book and you have to calculate the ACB accordingly.
  2. When it comes to calculating profit for scenario 5, I took the difference between market value and book value of the portfolio, then added leftover dividends that weren’t used for DRIPing. So the calculations were slightly different than the other 4 scenarios. 
  3. It is important to recognize that in addition to the ACB adjustment, the dividend is taxable in the year of the distribution. And the amount the dividend is taxed depends on whether it’s in the form of interest income, eligible dividend income, non-eligible dividend income, foreign income, capital gains, etc. In RY’s case, all the dividends received would be eligible dividend income. In VTI’s case, the distributions could be a combination of all the different forms. For simplicity case, I did not include this in the calculation. In other words, the profits for the two scenario 5’s could be higher than indicated in the tables above.
  4. For simplicity, I assumed that there was no commission cost for all the trades. And I also didn’t take capital gain and dividend tax into account for scenarios 2, 3, and 4. If I did, our trader wouldn’t have as much money to re-buy shares.
  5. As mentioned already, I did the calculations before VTI’s distribution in December. This, however, shouldn’t alter the results all that much.
  6. DRIPing provided a marvellous result for RY.TO while DRIPing VTI provided only an OK result. In case you’re wondering why, this is because of VTI’s high price and a relatively low dividend yield. Our trader  couldn’t start DRIPing addition share(s) until 2003, where she immediately started DRIPing additional sahres on the first RY.TO dividend payment date in 2000. 
  7. If we look at the charts for RY.TO and VTI, you can see a lot of similarities between the two. Hence, it makes sense why the analysis results are somewhat similar. If we were to perform the analysis on a stock with a completely different looking chart (i.e. VDE, Vanguard Energy ETF), the results would look very different. 

Final Thoughts

So… does market timing work?

Yes, it sure does but with a caveat. Hindsight is always 20/20. It is easy to use historical data to prove that market timing works. However, when you are in the thick of things, it’s nearly impossible to know what would happen to the market the next day. Back in 2006, there were a few indicators that hinted a recession, but could you have predicted that the market would start to nosedive in July of 2007? And how would you have predicted that the market bottomed out around March of 2009 and never looked back since?

Scenarios 3 and 4 are the perfect examples what happens when you time the market incorrectly – you end up with a lot less money! 

Please remember, market timing is easy when you’re looking at historical data. When it’s forward-looking, it’s a completely different animal.

In addition, for scenarios 2, 3, and 4, I assumed the trader saved up all the money she made from the stock sale, and continue saving $5,000 per year. How many people would not touch a large sum of money for years while continue saving money relentlessly?

Probably not that many.

I would guess the trader would have spent some money while she sat on the sideline. She probably wouldn’t be saving $5,000 a year with the sole intention to get back to the market.

For both Royal Bank and VTI, continued investing and DRIPing came out ahead (highest portfolio value for Royal Bank, 2nd highest portfolio value for VTI). Therefore, I believe, given that at best we have a 50-50 chance to predict what the market would do the next year, the next month, or the next year, it is far better to stay invested and reinvest dividends/distributions.

Often, keep it simple is the best thing to do.

I’d rather keep it simple and be able to sleep like a rock at night than trying to time the market and have roller coasting like emotions every day.

What about you?

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20 thoughts on “Does market timing work?”

  1. An interesting look at some typical scenarios, which may have played out among market participants. It demonstrates the wisdom of the simple buy and hold being superior to many other strategies.

  2. I agree that market timing doesn’t work. But market timing kinda worked for me in 4Q2018. Once volatility started, I decided to do some trading in my House Sale Fund portfolio. It ended up 5.8% for 2018 when the S&P 500 was down -6.4%. The only reason was I sold some positions before the pre-christmas meltdown, and bought back in aggressively on Christmas eve.

    If I didn’t time that market, my portfolio would have been flat. Have the charts to show everything in my 2018 review.

    LUCK baby! But also guts to trade big positions.


  3. I buy up I buy down I buy in between. Best strategy ever lol.
    I hear people all the time saying they won’t buy because they don’t want to buy a falling knife but I’m like I’ll keep buying if a stock is good it will go back up again.
    Great analysis.

  4. Hey Bob,

    Really cool seeing the scenarios played out that way for colour. I also think the Peter Lynch quote does well to tell the story as well; market timing theoretically can work, the problem is that no one will ever know when it’s time to buy/sell in advance. It makes the most sense to have a strategy and stick to it. Mine is to simply continue accumulating assets (dividend growth stocks as far as the market is concerned) and reinvest the passive income over time to get the benefit of compounding.

    Take care,

    • Hi Ryan,

      Yup, I really like Peter Lynch’s quote. Continue accumulating assets and reinvest the passive income over time will provide great benefits long term.

  5. I certainly have no idea what the stock market is going to do tomorrow or next week, but I’m fairly certain I can make informed economic decisions on some specific businesses. Either they’re predictable enough, or I know the business well enough to say “this company will earn roughly X in the next year”.

    I can then make an informed decision on whether to buy shares or not. I don’t call this market timing, but many people confuse the two different ideas.

    • Yup, it’s not hard to make informed economic decisions on some specific businesses. It’s just hard to predict whether the economy, as a whole, will hit a road bump and go into recession or not. It’s even harder to predict whether we’re at the top or at the bottom.

      If you do your research to determine when a stock is fair valued or under valued, that’s not called market timing. 🙂

  6. That’s really interesting analysis–thanks for taking on that challenge as I am sure it was time consuming! It is interesting to see the difference between the individual stock and the ETF, and I like how reinvesting the dividends stands out at the end between #5 and #1.

    The key thing to remember here, as you mentioned, is that this is done with 20/20 hindsight. I recall reading an article about how missing a single day in prior recoveries significantly impacted the returns; I’ll have to see if I can find that article. For me, now and in prior bear markets, I’ve simply plugged along like #5.

    • Thank you DivvyDad. It took a while to sort out the prices but the actual analysis didn’t take that long. It was quite interesting how reinvesting the dividends can improve your overall portfolio value.

      Yup, hindsight is 20/20, it’s easy to do analysis with historical data. Forward looking is so much harder. It’s just easier to stay in the market and continue to DRIP. 🙂

  7. Hi Bob,

    Great analysis!! When I first started investing many years ago I dabbled with many different strategies. Over the years I’ve dedicated my core holdings to the simple approach. Prior to retirement, I would use savings, tactical DRIPS and trading profits (options & swing trading) to purchase more dividend stocks. I know… swing trading is a form of market timing but its only a small component of the overall portfolio. I have fun with it so I don’t mind, also it’s in dividend stocks so if I need to hold it longer term its ok.

    How do you decide what portion of your portfolio is allocated to dividend growth vs ETFs? I believe both methods have merit and thought about adding ETFs to my portfolio.


    • Thank you Ernest. Swing trading is an interesting market timing strategy for sure, if you limit your exposure it might be worthwhile. Personally, I haven’t tried options yet, just figured it’d take too much of my time. 🙂

      Our dividend growth stock and ETFs mix is always changing, we don’t set a specific target. Ideally a 50-50 split would be nice.

  8. I love the depth of this analysis. I wish I could follow how you did all the calculations. When I have more time, maybe I’ll look at the spreadsheet you offered.

    I would like to propose another scenario. What if the market timer doesn’t pick dates to get in and out of the market arbitrarily that is subject to this hindsight analysis.

    What if the market timer looked at the Shiller P/E charts ( and decided to get out whenever it was over 25?

    Or better yet, what if the market timer decided to slowly exit or shift 5% of his/her portfolio to bonds every month that the markets stayed above 25 and went the opposite way when it was below 25?

    I’m not exactly sure what leads to the best results, but looking at the Shiller P/E chart would tell you that the markets in 2009 were the cheapest they’ve been in around 20 years. You might not have picked the exact bottom, but I’m not sure why an intelligent trader would sit on the sidelines until 2010 or 2011 when they are staring at the cheapest valued market in a long time. At the same time, I was writing an article in March about the P/E being 33 and asking what would happen if the market dropped 50% based on that.

    I personally have just stayed in the market myself, because I’m very aggressive and I have a lot of years for the markets to do their stuff. However, when I did the Shiller P/E get over 30, I start to slowly shift my asset allocation more to bonds. I could shift back to stocks buying more at cheaper levels today, but I’d like to see that P/E get to around 24 before I start changing my asset allocation back to being more aggressive.

    • Thanks man. Yes it would be interesting to do a similar analysis by looking at the Shiller P/E chart. By quickly looking at the chart, it doesn’t look like you’ll be invested in the market for very long between 2000-2018 though. And with human nature, when things are going up, it’s tough not want to invest despite warning signs are going off.

      I think rather than trying to time the market, it’s just way easier to stay in the market and watch your asset allocation.

      • If 25 was the marker that you choose, then you would have been out of the 2000-2018 market during those bad times. You would have gotten a bump from 2002 to 2003 and then missed the sideways move until the 2009 crash. Then you would have kept buying down through until 2014. I guess you would have missed out of the bull market since then, but some of that has already been given up.

        Since this idea is purely objective, I think it takes human nature out of it. You could program a robot to do it and never have to look at it.

        I’m not suggesting getting in and out of the market completely, but using the markers to change your asset allocation (which is what I think you mean by watching it). Let’s just presume that you switched to bonds during those times as defensive measure (unfortunately I don’t have those number, but I presume they would have been safer). That way you are still getting income and it’s not dead money.

        I guess the bottom line is that there are indications when the market is overpriced. None of the crashes should never have been a shock when it comes to valuations. And if you look at when the valuations are low, it’s always a good time to pour money in.

  9. Great write up. Your analysis also shows that investing in a high quality dividend stock over an ETF was much more favourable


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