Market Timing vs. DCA: 50-Year Backtest — Full Breakdown & Transcript

[00:00] I backtested over 50 years of stock market results to finally prove, mathematically, that time in the market is useless. To do this, I tested different market timing strategies that investors can actually apply

[00:13] to their investments, and the result was quite interesting. So, even if you already know that time in the market is hard, hope whenever you think about it, what I researched here has never been done before and is the final proof in it.

[00:26] My name is Rick, some of you know me as the true love mother of your nobility, And today I'm going to show you a little mathematical proof that coming in the market not only is hard, but it's not even useful. So, let's start. First of all, you might have heard from me or from other YouTubers like Humphrey Young

[00:41] that Schwab did a study in 2003 proving that trying to find a market is not worth it. The problem with that study is that it doesn't actually backtest real strategies that invest in you. Schwab imagined five investors and had one of them invest in the best moment of every

[00:57] year, one in the worst moment of every year, and so on. But when we invest and try to find the market, we can't really know when the best moments and worst moments are going to be. So in my study instead, I actually used measurable strategies that you can actually apply in

[01:11] your investments to try to find the market. And I compared them with the famous dollar cost averaging method, investing once per month and once per year. Here's how I structured the study. and imagined 2 investors, each of which received $2050 at the beginning of every month for

[01:28] the 20 and 50 years ending September 2034 and invested this money in the S&P 500. Peter Pee, the price-to-earning ratio investor, collected the money every month and invested everything he had as a lump sum every time the price-to-earning ratio of the S&P 500

[01:45] was lower than 3 months before. 1. Monthly, the monthly market timer collected the money every month and invested everything he had as a lump sum every time the price of the S&P 500 was lower than one month before.

[01:58] 2. Quarter, the quarterly market timer collected the money every month and invested everything he had as a lump sum every time the price of the S&P 500 was lower than three months before.

[02:10] While half the half market timer collected the money every month and invested everything he had as a lump sum every time the price of the S 500 was lower than six months before Every average the dollar cost average investor invested at every month

[02:26] right away, regardless of the price of the stock market. And the last, forest first, the investor who wanted to be first, invested once per year at the beginning of the year. I started with a first analysis with a 20-year timeframe, and to confirm it with a bigger data set, I doubled down with a

[02:42] second analysis taking 50 years of stock market. For the stock market price, I downloaded a daily price of the S&P 500 index of the last 50 years from WSJ.com. You're going to find the

[02:55] source link in my study that I make available to you, of course, for free through the link in the description below. The value of the price-earning ratio of the S&P 500 was instead taken from MultiPly.com and from macro-trends.net. These sources will also be in my study. Let's start

[03:10] from the results of the twin years that test. By the way, in my study next to the possibility of changing the monthly cash available, which in this case is $250, I also considered a $1 transaction fee. I did it because depending on the strategy you use, you're going to invest more or less times

[03:27] every year. So a fee that you paid for every transaction can potentially influence the results. You can change the monthly cash available as well as the transaction fee on the table here. So this is the graph of the S&P 500 index . In blue, AdWords hits price-to-earning ratio in red

[03:43] in the last 20 years and in the last 50 years. Oh boy, how bad does the P.E. ratio look like in 2008? Anyway, let's start with Peter P., the price-to-earnings ratio investor. The red lines

[03:55] you see here are the times where Peter P.E. invested. Invested all he had every time the the P.E. ratio was lower than three months before. In 20 years, Peter P.E. invested a total of 106 times,

[04:08] and every time he invested a fund that went from $250 to almost $4,000. Monthly-monthly instead, the one that invested every time the market was at a lower price than one month before made a total of 169 small investments spread over the 20 years,

[04:23] all between $250 and $1,250. Carter Porter the one that invested every time the market was down compared to 3 months earlier made a total of 120 investments ranging from to Ross Haff who invested when the market was down compared to the previous six months

[04:42] made only 91 investments in 20 years, ranging from $250 to $4,000. I want to specify again that each investor will receive the $250 every month, so they all receive the same amount of money,

[04:56] and also at the same moments in these 20 years. The only difference is when they invest them. Avery Average invested a total of 240 times and always $250 since he invested every month for 20 years.

[05:08] And Forrest First invested $3,000 for a total of 20 times since he invested 1 per year for 20 years. The result of that 20 years backtest is very interesting because you can see that, despite trying to time the market with value strategies like looking at the P-E ratio

[05:24] or buying when the price was lower, Avery Average with a simple dollar cost averaging method field managed to achieve a portfolio close to the best possible, with a total of $189,344.

[05:37] Only Dealer P managed to earn around 0.5% more, or a thousand bucks more, with a final portfolio of $190,366. This clearly shows that the effort to try to time the market, even trying to put aside

[05:52] more cash reserves and investing when the market is down, isn't really worth it. If we look at the the attempt to catch the bottom of bear markets like Ralph Husted, investing only when the market has been down for 6 months, we see that the results actually damage you.

[06:06] This is because, instead of investing cheaply, most of the time you miss some growth because you are waiting in vain for the long bear market that almost never comes. Now since 20 years gave me interesting results but still pretty similar to each other, I

[06:20] decided to do a second backtest analyzing the last 50 years of the S&P 500. to be precise, the last 47 years, because I couldn't really get the S&P 500 prices for the three years between 1974 and 1977.

[06:34] I'm going to jump straight to the results, because here, with a longer time frame, you can actually start seeing substantial differences in the strategies. And guess what? The dollar cost averaging method of investing came out as a winner, making a final portfolio

[06:48] after 50 years equal to So with a timeframe that includes long bear markets long bull markets recessions and so many facets of a developing economy the attempt to climb the market using

[07:05] the strategies of PIDOPE, MONTY MONTLY, CUTTER QUARTER and WALP TASK actually damaged the funder portfolio. PIDOPE ended up with 2.7% less than the dollar cost average strategy,

[07:18] which translates to a loss of $51,620. While TAP, waiting 6 months before pulling the trigger on a bear market, made $59,309 left.

[07:30] The lesson here is clear. Not investing because you want to wait for a bear market, even using impractical approaches like monitoring the P-E ratio or the price of the market, actually makes you lose money in the long term.

[07:42] The simple but effective approach of just constantly investing, Every month, the same amount of money, regardless of the market, is not only simple, but gives you a better result in the long term. Guys, I don't know about you, but I'm gonna set up a savings plan right now and start

[07:58] dollar-cost averaging in the S&P 500. Oh, wait. I do it already. By the way, if you want to know how much you're going to have in the future, depending on how much you invest, you can download my free compound interest calculator from the link

[08:12] in the description below. You can write here your initial capital, the yearly rate of return of the market, which is around 10%, the monthly investment you intend to make, and the financial goals you want to achieve. And the table is going to calculate how many years you're going to need

[08:25] and how your wealth is actually going to develop over the years. Alternatively, if you have a fixed time frame because, for example, you're going to retire in, let's say, 20 years, you can use this table here and you write the number of years you're going to invest.

[08:38] Based on your input, the table tells you what should be your monthly investment in order to achieve your desired goal in the given time frame. Don't forget to download my study, it's free, and you'll find it in the description below.

[08:50] Only thing I ask in return is to print, be nice, and drop a like to this video. I would really, really appreciate it and it helps my channel a lot. I hope you enjoyed this video. If you have any questions, just write a comment down below.

[09:02] And if you haven't done it, remember to subscribe to the channel to join our community of investment enthusiasts. I wish you a great day everyone and as always I'll see you in the next video. Ciao!