I suppose index funds are fine if you can time buys/sells with the booms and busts. These days I sure don't feel like holding them. It's sad but the best bet is just picking the hot algo stocks.
I will note that the market is much different today than it was in 2004. Today HFT accounts for 70% of volume. That is huge. I think having an investing strategy that does not assume an asset will always go up is important.
> I am aware of many people that are successful traders.
You have to ask then if they own personal airplanes, yachts and private islands? If the answer is 'no', then you have to wonder why not?
I think the problem is that individual successful traders are just traders who are randomly successful. You hear about them because they are the ones that get lucky and brag about it. Those who are unsuccessful will probably remain forever anonymous to the public and even their friends.
The only ones that can "beat" the market are the ones that do it via technical means (minimum latency to the exchange, fastest computers, insider info, etc.) I think these are just the large investment banks.
> You have to ask then if they own personal airplanes, yachts and private islands? If the answer is 'no', then you have to wonder why not?
I am a software developer. Am I not successful because I dont own personal airplanes and a private island? I don't think these things define my success. Regardless, you have provided a straw man argument.
The people I know who are successful traders all have different MOs. What defines there success is that they stay in the black. Hence, they are able to time the market.
You don't need minimum latency to the exchange, fastest computers, insider info. As an example check out the performance of Fund My Mutual Fund. This is a virtual mutual fund that is soon to launch for real.
Now if you say you have found a way to beat the market through research, technical or fundamental analysis, your limit would be unbounded (theoretically). Your charts looks good and are very impressive, but it is only 2 years and you would not be showing them if they didn't do well. So for all I know you are just one of the random lucky ones that beat the market. Now if you had a way to consistenlty get 10% (and maybe you did!), in a decade or so you could be another Donald Trump. You need to convince others that you can do it and then soon you will start getting large investments.
> What defines there success is that they stay in the black. Hence, they are able to time the market.
If they can time the market, are they fully invested in it. Would they sell their house and get everyone they know to do the same so they can pour that into the market, then re-invest and eventually rule the world? Another way to ask the question is why haven't the big investment banks figured out the strategy, and as a result, diluted the strategy by now?
Also what about the ones that don't stay in the black. Will they tell you, would you know how many have tried and failed? That is the true criteria. You would have to have a large group of traders commited to making money in the market. Then they all try for a fixed amount of time and in the end you see how they perform as a group. Now, essentially, you are just pickding the ones that performed in the black and using that as an argument that invididual trading can be a 100% profitable business.
That depends very much on exactly what you mean by "time the market".
It is impossible to reliably predict whether the market will go up or down on any given day. It is also impossible to reliably predict exactly when a market will hit a peak or trough. Dollar-cost averaging is a great strategy to reduce the risk associated with the inability to "time" markets in this sense.
But it is completely possible to recognize that a particular asset (or class) is over- or under-valued, as long as you have good enough information. You can't necessarily predict how long it will take for its value to be more accurately reflected in the price (another sense in which you "can't time the market"), but you can recognize that certain assets are on sale or commanding a premium price, and therefore get a good price on/for certain assets.
Portfolio rebalancing is, in part, meant to help capture this. Investing more in assets that have fallen behind, and less in those that have gotten ahead, is a (very rough) mechanism for selling high and buying low. Value investing is even more about this -- explicitly putting money into assets when it is cheap to do so, and selling assets that people are putting money into when it's expensive to do so. The idea is not to "time the market" in the sense of knowing exactly what day the market will turn, but simply to take advantage of really good deals (in the long-term sense) when they present themselves.
On the 30 year chart, the peaks on the 20-50% line are a couple percent above the peaks on the all line. Boosting returns from 7% to 9% over 30 years, or from 12% to 14% over 30 years, results in over 70% more total wealth after compounding. The visual difference is not as striking on the 30 year chart as on the 5 year chart, but that's because you're presenting annualized rather than total returns.
> During the decade of the 1980s, the Standard & Poor's 500 Index provided a very handsome total return (including dividends and capital changes) of 17.6 percent. But an investor who happened to be out of the market and missed just the ten best days of the decade—out of a total of 2,528 trading days—was up only 12.6 percent. [...] market timers risk missing the infrequent large sprints that are the big contributors to performance.
Invest in S&P 500 ETF (SPY) starting at inception
Growth of $100,000 from 1/29/1993-8/30/2010
Buy and Hold: $324,330.15
10 Best Days Removed: $156,354.12
10 Worst Days Removed: $692,693.90
10 Best and 10 Worst Days Removed: not listed, but very close to Buy and Hold (the green line in the chart)