A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

by Burton G. Malkiel

An investor who frequently carries a large cash position to avoid periods of market decline is very likely to be out of the market during some periods where it rallies smartly. Professor H. Negat Seybun of the University of Michigan found that 95 percent of the significant market gains over a thirty-year period came on 90 of the roughly 7,500 trading days. If you happened to miss those 90 days, just over 1 percent of the total, the generous long-run stock-market returns of the period would have been wiped out. Studying a longer period, Laszlo Birinyi, in his book Master Trader, has calculated that a buy-and-hold investor would have seen one dollar invested in the Dow Jones Industrial Average in 1900 grow to $290 by the start of 2013. Had that investor missed the best five days each year, however, that dollar investment would have been worth less than a penny in 2013. The point is that market timers risk missing the infrequent large sprints that are the big contributors to performance.