Where is the link between the graphical analysis (investors as a whole are bad at timing the market) and the subsequent quotes, (e.g., Bogle saying "I do not know anybody who has done it successfully and consistently. . . .")<p>It is a far cry from knowing that investors _as a whole_ don't market time well, but that has nothing to do proving that some skilled specific investors might not be good market timers.<p>For the record, I do think there's evidence out there that does show that even the "best" market timers succeed largely because of chance or luck, but it's not something you can get to from the data offered here. Because there are individuals who do succeed at timing the market. The question is whether they succeed due to skill or luck. . .
How does outflow of capital from one asset to another measure investor's ability at timing the market? Yes, one pulls out on equity if one predicts that S&P500's going to drop but most of times decisions are made based on the volatility and risk tolerance. A retirement fund with a closer retirement date or income/growth fund will pull out if they find the risk/volatility level of the general market to be unacceptable.<p>A better measure of investor's ability to time the market is the performance of hedge funds as by its nature, the traders trades both sides of the market and performance is measured by their ability to predict both downward and upward trends.
And how are those folks faring who didn't time the market for the past decade? On average, their funds are at the exact same place they were in 2001.<p>I work for a company (who I won't mention simply because I don't want it to appear that I'm shilling for them), who has used market timing since 1972 and over the past 40 years have consistently outperformed the market using three fairly simple market timing indicators. Not by leaps and bounds - generally just a few percentage points - but still outperforming.
Er, every transaction has both a buyer and a seller – both of whom are investors. If one is timing well, the other is timing poorly – summed over both, the class of all 'investors' can never be winning or losing from timing. Only subsets of investors could.
Sounds like BS:<p>> <i>On the x-axis we show the flow of capital into an asset class</i><p>For every buyer, there is a seller, so every single transaction nets out to exactly $0 flowing into the asset class. So exactly how does capital "flow" into or out of an asset class?<p>You would guess that they are confusing the change in valuation, but that is what they are using for the other axis.
I believe this is testing a false premise. The premise is, that when investors think the market is going to go up in the next month, they move money into mutual funds, and that when investors think the market is going to go down in the next month, they move money out.<p>I'm sure some proportion of investors move money in and out of mutual funds based on their market expectations, but I do not believe they do so with a single months time horizon, nor do I believe they are the majority.<p>I submit that a potentially quite large proportion of investors-- especially in mutual funds-- are not doing this, but are instead moving money into those mutual funds each month as a percentage of their paycheck goes into their 401k or into their savings plan. Further, some large proportion is likely investors moving from one mutual fund to another, while others are cashing out because they retire, etc. I bet a check on your flow dates to see if its correlated with an annual peak in employment change dates (e.g.: what month are people most likely to retire, or change jobs?) might find some correlation.<p>Worse, if I'm reading it correctly, this plot shows the return of the asset class over the course of a single month.<p>This means that you're assuming that these mutual fund investors are trying to time the market on the scale of the expected return within a month. This seems implausible to me given that mutual funds are managed and thus not well suited for timing (a lot easier to time the earnings announcement of Google, for instance, than guess what moves a mutual fund manager is going to make in a particular month.)<p>I suspect that most investors who choose mutual funds have at least a years time horizon, if not 5 years or more.