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Black swans, market timing and the Dow

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  • Javier Estrada

Abstract

Do investors in the US stock market obtain their long-term returns smoothly and steadily over time or is their long-term performance largely determined by the return of just a few outliers? How likely are investors to successfully predict the best days to be in and out of the market? The evidence from the Dow Jones Industrial Average over the 1900-2006 period shows that a few outliers have a massive impact on long-term performance. Missing the best 10 days resulted in portfolios 65% less valuable than a passive investment and avoiding the worst 10 days resulted in portfolios 206% more valuable than a passive investment. Given that 10 days represent 0.03% of the days in the sample, the odds against successful market timing are staggering.

Suggested Citation

  • Javier Estrada, 2009. "Black swans, market timing and the Dow," Applied Economics Letters, Taylor & Francis Journals, vol. 16(11), pages 1117-1121.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:11:p:1117-1121
    DOI: 10.1080/17446540802360074
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    Cited by:

    1. Charles, Amélie & Darné, Olivier, 2014. "Large shocks in the volatility of the Dow Jones Industrial Average index: 1928–2013," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 188-199.
    2. Harald de Bruijn & Andreas Größler & Nuno Videira, 2020. "Antifragility as a design criterion for modelling dynamic systems," Systems Research and Behavioral Science, Wiley Blackwell, vol. 37(1), pages 23-37, January.
    3. Lin, Wen-Yuan & Tsai, I-Chun, 2019. "Black swan events in China's stock markets: Intraday price behaviors on days of volatility," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 395-411.

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