years. In later years if this strategy is pursued with index futures or
ETFs, the transactions costs would be lower. Each 0.1 percentage point
increase of transactions costs lowers the compound annual returns by 29
basis points.
Although the excess returns from the timing strategy disappear
when transactions costs are considered, the major gain from the timing
strategy is a reduction in risk. Since the market timer is in the market less
than two-thirds of the time, the standard deviation of returns is reduced
by about one-quarter. This means that on a risk-adjusted basis, the re-
turn on the 200-day moving-average strategy is quite impressive, even
when transactions costs are included.
Unfortunately, the timing strategy has broken down in the last 17
years. The year 2000 was particularly disastrous for the timing strategy.
With the Dow Industrials meandering most of the year above and below
the 200-day moving average, the investor pursuing the timing strategy
was whipsawed in and out of the market, executing a record 16 switches
in and out of stocks.
Each switch incurs transactions costs and must overcome the 1 per-
cent pricing band. As a result, even ignoring transactions costs, the tim-
ing strategist lost over 28 percent in 2000 while the buy-and-hold
strategist lost less than 5 percent. Since 1990, the buy-and-hold strategyCHAPTER 17 Technical Analysis and Investing with the Trend 299
TABLE 17–1
Annualized Returns of Timing and Holding Strategies, January 1886 through December 2006No. Trans. Cost Net Trans. Costs
Return Risk Return Risk
1886 - 2006 9.68% 21 .5% 10.21% 16 .7% 8.63% 17 .3% 62.9% 350
Subperiods
1886 - 1925 9.08% 23 .7% 9.77% 17 .7% 8.11% 18 .0% 57.1% 122
1926 - 1945 6.25% 31 .0% 11.10% 21 .8% 9.44% 22 .7% 62.7% 60
1946 - 2006 11.23% 16 .0% 10.21% 14 .2% 8.70% 15 .1% 67.4% 168
1990 - 2006 11.76% 14 .7% 6.60% 16 .9% 4.30% 18 .3% 73.7% 74
Excl. 1929 - 1932 Crash
1886 - 2006 11.30% 20 .5% 10.80% 16 .5% 9.23% 17 .2% 64.2% 334
1926 - 1945 17.72% 25 .9% 15.75% 21 .3% 14.24% 22 .1% 71.2% 44Timing StrategyReturn Risk Market% in SwNoitches. ofHolding Strategy
Period