has returned 11.76 percent annually whereas the timing strategy has re-
turned only 6.60 percent, even before transactions costs.^12
The timing strategy did avoid some nasty bear markets over the
past decade. A timing strategist would have exited the market on June
25, 2001, and avoided the entire drop associated with the terrorist at-
tacks. But what looked like a big gain for the market timer was mostly
eliminated by the sharp stock rally to close the year. The timing strate-
gist would have reentered the market on January 3, 2002, at a price only
2.3 percent below the exit price six months earlier. But timing investors
did miss the second leg of the bear market, exiting stocks on June 4, 2002,
at 9,889 and not reentering until nearly a year later, on April 22, 2003,
when the Dow was at 8,325, nearly 16 percent lower.
The Nasdaq Moving-Average Strategy
It is remarkable that during the 1990 to 2006 period when the moving-
average strategy on the Dow Industrials failed to generate good returns,
the exact same strategy proved very successful on the Nasdaq. In Table
17-2 it can be seen that the timing strategy outperformed the holding
strategy by nearly 5 percent per year since 1972 and by nearly 4 percent
per year since 1990. Again, the market timer achieved these superior re-
turns with much lower risk.
What is most important about the moving-average strategy is that
it keeps investors in major bull markets and out of major bear markets.
The strategy worked beautifully during the technology bubble of 1999 to
- Using the timing strategy, an investor would have entered the Nas-
300 PART 4 Stock Fluctuations in the Short Run
(^12) Note that during the 1990 to 2006 period, the risk, measured in annualreturns, is surprisingly
higher for the timing strategy than for the holding strategy. This unusual reversal of risks is due to
the extremely poor returns for the timing strategy in 2000. If monthlyreturns are considered, the tim-
ing strategy had lower risk than the holding strategy over the same period.
TABLE 17–2
Annualized Returns of Nasdaq Timing and Holding Strategies, January 1972 through December 2006