Although there is very little evidence to support the belief that actual investors consistently play the timing game successfully, manyinvestors continue to try and perhaps some consistently succeed. Skill in making the judgement with respect to timing can be extremelyrewarding. Switches in and out of the market at major peaks andtroughs, even if the alternative holding were only cash, would haveproduced high annual rates of return during the 1960s and the 1970s.
The report of the Bank Administration Institute suggests a statisticfor judging the skill with which the timing problem is handled by the average investor.Thestatistic is the difference between two rates of return. The first is theactual rate of return on a portfolio during the period in question.The second is the hypothetical rate of return that would have beenearned on the portfolio if the allocation of funds between equitiesand fixed-dollar assets which existed at the beginning of the periodhad been maintained throughout the period.
A simple example should make this clear. Assume that the assets in portfolio A were distributedas in table 14-1. If the rate of return on equities were 10 percent,and that on bonds 5 percent, the actual return on the portfolio (assuming the switch to equities was made at the outset of the period) wouldbe 0.5(0.10) +0.5(0.05), or 7.5 percent. The hypothetical rate ofreturnthat which would have been earned with no reallocation offundswas 0.3(0.10) + 0.7(0.05), or 6.5 percent. Thus the reallocation was profitable.