Scroll down for a table showing hypothetical results of an investment in the Nasdaq Index from 1972 through 2001 with and without the use of a simple market-timing system.

That timing system, known as the 100-day moving average, is purely mechanical and can be applied to mutual funds without relying on judgments, forecasts or analysis. It is designed to capture the bulk of upward movements during bull markets while protecting assets in a money market fund during the bulk of bear markets.

Assumptions:

1. NDX 100 index used from 1/3/1990 to 12/31/2001
2. NASDAQ composite used from 12/31/1971 to 1/2/1990
3. Same-Day Trading
4. Commercial Paper Rates are used to simulate money market yields.
5. Fund expenses and management fees are neglected
6. The margin rate is assumed to be 3% above the commercial paper rate.
7. Results are hypothetical.

Used diligently with an aggressive fund, this system is certain to reduce risk and likely to increase return. Here's how it works: Every day, calculate the average of the most recent 100 closing prices of the fund. If the current price is above that average, buy it or hold it if you already own it. If the current price is below the average, sell it if you own it. After you sell, park your proceeds in cash until the price is above the average again.

There's nothing magic about the number of days, 100, except that it's easy to calculate and a reasonably good tradeoff between tracking short-term trends and long-term ones.

The table shows year-by-year comparative returns with and without timing. At its core, here is what the system did: It directed investors in this index to move to the sidelines 109 separate times and stay there for a total of about 36 percent of the time during this 30-year period. The final result was dramatic. Annualized return rose from 11.8 percent without timing to 18.9 percent with timing. That is a huge difference. An initial investment of $10,000 in 1972 would have grown to $283,958 without timing or to $1.8 million using this timing system.

The table shows nine measures of risk, and in every one of them, timing reduced the risk of this investment quite significantly. The meanings of some of the risk measurements are obvious, but here's a quick guide to a few that aren't:

• Standard deviation is a statistical measure of unpredictability. The higher the number, the wider the variation among annual returns.
• The worst drawdown is the largest drop in value from a peak to a bottom that an investor had to endure in order to stick with this investment strategy for the entire time.
• The worst five drawdowns presents the average of the five largest drops in value. This figure shows investors what they should expect as a normal occurrence every five to six years.
• The Ulcer Index is a statistical measure based on daily declines. The larger the number, the more aggravation an investor is likely to experience on a day-to-day basis.

The trading statistics give some very important data about this timing system. On average, this system generated about four temporary investments (each one a purchase followed by a sale) per year. More than two-thirds of those temporary investments were unprofitable, likely leading many investors to give up on market timing. Only 31.2 percent of these investments resulted in a profit.

Nevertheless, the timing system was able to multiply the final return more than six times because the gains were large and the losses were much smaller. The average gain on the profitable investments was 15.9 percent, while the average loss on unprofitable investments was only 1.5 percent.

The largest single gain was 71.3 percent, while the largest single loss was only 5.1 percent. That's why market timing can produce spectacular long-term results even though it is "right" about the direction of the market less than one-third of the time.

This study ignored the effect of taxes, which would have reduced the net return with timing. Future returns and results will be different from those shown here, and there is no guarantee that this timing system will work equally well in the future.