Market timing and portfolio diversity

I gave some anecdotal evidence earlier about market timing. Well, here's some actual empirical evidence in a study by a Michigan University Professor Dr. H. Nejat Seyhun.

95% of the market gains between 1963 and 1993 stemmed from the best 1.2% of the trading days

The index gained at an average annual rate of 11.83%, for a cumulative return on $1.00 of $23.30 over 31 years. If the best 90 trading days, or 1.2% of the 7,802 trading days, are set aside, the annual return tumbles to 3.28% and the cumulative gain falls to $1.10

In the 1926-1993 period, missing the best 5.9% of the months (a total of 48 months) would have created exposure to 83% of the risk of continuous stock market investing, but the average annual return would have been 19% less than the return on Treasury bills.

In the 1963-1993 span, missing the best 0.8% of the days (a total of 60 days in all) created an exposure to 94% of the risk of continuous stock market investing. In this situation, the average annual return would have been 11% less than that of Treasury bills.

Of course, I'm curious to see a similar study include 1993 - 2008, and see whether it still makes sense to always stay in the market. The dot-com boom & bust is my main scrutiny here.

Yahoo Finance Chart of Dow, Nasdaq, S&P 500 from 1/4/1993 - 4/1/2008

That chart shows that had you put money in the market in January 1993, and forgot about it until now, you would still be sitting on a 200% - 300% gain. The tech-heavy NASDAQ hasn't yet climbed back to its 2000 peak, but both the DOW and S&P500 have already surpassed their dot-com highs while pulling back a little during the beginning of 2008. Makes sense to diversify after looking at that, unless you're trying to time the market and strike it rich/bankrupt really fast.

Being human, we probably can't forget about our money, and emotions can easily drive us to panic sell and get out of the market during declines. For the Nasdaq in hindsight it was a good thing to do at the peak. But again, that would have meant you could time the market. The overused phrase from Warren Buffett "Be fearful when others are greedy, and greedy when others are fearful" are words I've taken to heart. I've even put them into practice during the recent market declines.