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Behavioral Finance

Quiz: How Easy Is It to Beat a Buy-and-Hold Portfolio?

One of the illusions that many investors have is that it’s worth trying to beat the market. It’s time to put your knowledge to the test and take our quiz.

Articles by Dan Egan

By Dan Egan
Managing Director of Behavioral Finance & Investing, Betterment
Published: December 29, 2014 | Updated: May 10, 2018

Many investors believe (or act as if they believe) they can beat the market through timing their deposits or asset allocation.

Our interactive simulation puts you in the driver’s seat to decide whether to invest or sell based on actual New York Times headlines since 1928.

Headlines and market news can inspire investors to take all kinds of actions. Surely, news about oil prices dropping means it’s a good time to gobble up gas company shares at a discount price, right? Or expected interest rate changes means it’s time sell off bonds?

News is designed to strike an emotional chord within you. But too often that can undo returns for investors over time—they buy or sell based on an emotion, rather than holding steady over the long term with an index-fund portfolio, which studies have shown deliver better returns.

We’ve created a simulation that allows you to compete against a buy-and-hold portfolio based on historical data and the corresponding headlines from the New York Times

Market Timing Simulation

A simulation of a historical portfolio with random dates between 1928 and 2014

Why did we make this simulation?

Despite decades of investor education efforts, many investors still engage in behavior—such as market timing—that reduces their take-home returns. At Betterment, our smart investing service mitigates much of that by providing a buy-and-hold portfolio. The result is that we can help add an additional 2.66% in returns compared to the average DIY investor.

We’ve written extensively about the value of ‘time in the market,’ not ‘timing the market.’ The above simulation lets you put that theory to the test with actual data. Remember, the more time you have in the market, the better chance you have of reaching your investment goals.²

How the Simulation Works

  • The simulation uses historical data (stock and bond returns from January 1928 to December 2013).
  • For each investment choice, we randomly selected a six-month period that falls sometime from 1928 to 2013.
  • We used page-one financial headlines from the New York Times business section, selected from the first day of the randomly selected six-month period, and masked the date on first view. This way, you have a general sense of the news, but you don’t know exactly what will happen.
  • For each six-month period, you choose whether to invest in the diversified portfolio or put your money in cash.
  • After you make your choice, we’ll show you which date was selected and play out the returns over those six months.
  • Next, we’ll select a different random period and repeat the choice.

This blog post was produced with Joe Jansen.

¹This quiz is intended for informational purposes only. This information is based on the historical analysis of the S&P 500, not a Betterment account/portfolio. Historical S&P 500 data and government bond data is available at Yahoo! Finance and from Robert Shiller. The charts in the quiz do not factor in trading, taxes, or transaction costs. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and Betterment’s charges and expenses. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature.

²If you’re like us, you’ll want to test out the quiz repeatedly and see if you can beat the market. Go for it! And, spoiler alert, you can beat the market in our quiz occasionally. But, doing so can be considered an outlier event, similar to winning the lottery or finding money on the street. The odds favor a buy-and-hold strategy the majority of the time.

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