Buy and hold vs market timing portfolio strategies

There are certain things which do not make sense when comparing theory with practice. Finance theory shows that simple buy & hold/passive investing wins iver market timing/active investing. But in practice people keep trying to make more returns than markets. Few lucky ones blow their trumpets (and hide their losses when luck becomes dry). The rest keep trying just to waste more and more resources.

Infact theoretically, finance industry should not be as big and profitable. The profits are not made of market timing but via commissions and exorbitant spreads between costs and incomes of providing funds.

Yi Li Chien of St Louis Fed shows in this yet another small note how buy and hold wins over market timing:

This return-chasing behavior may be costly for mutual fund investors. Given that stock market returns are essentially unpredictable in the short run and move back to their average in the long run, return-chasing behavior can miss the market timing—that is, investors may buy when prices are too high and sell when prices are too low. This market mistiming can reduce investors’ profits, which is also implied by the negative correlation between mutual fund flows and future returns shown in the table. To assess how much return-chasing behavior costs investors, I compare the results from return chasing and buy-and-hold strategies. The former exactly replicates the equity flows observed in the data and the latter assumes investors simply buy equity and hold it for an extended period of time. Because return chasing changes the size of investors’ equity positions over time, the returns of both investment behaviors are weighted by the value of the assets held. 
The figure plots the difference between the annual returns from the return-chasing strategy and the returns from the buy-and-hold strategy over rolling 7-year windows. The differences are all negative (i.e., the return-chasing strategy results in relative losses each year) except for a few quarters in the early 1990s. Thus, a simple buy-and-hold strategy almost always performs better during this sample period. Moreover, the difference in returns between the two strategies can be large: The buy-and-hold strategy outperformed the return-chasing strategy by up to 5 percent, meaning that the cumulative difference in returns over 7 years could be as high as 40 percent. Ultimately, this analysis shows that poor investment timing caused by return-chasing behavior has a significant impact on portfolio performance.
Who cares?
Just pointing to these lessons over and over again will not help. A call by finance professors to limit useless financial activity and labor employed in the sector will do the world a lot of good. Instead they love to point to the need to have deep and vibrant financial markets..

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