Great simulation (on Quartz) for students to see the futility of trying to time the market, which is the belief that you can make good decisions about when to get out of the market (if you think it is overvalued) and to get back in (when you think it is undervalued).
This simulation uses prices from the S&P500 for a ten year period (this ten year period changes every time you play the game too!) which unfold on the line graph at the rate of about one year of data every 7-10 seconds. Here is a screenshot after seven years elapsed (note the talking head on the left which provides tempting advice as the game unfolds).
Here is a sample output after the game is completed (total time per game play is about one minute):
What you just saw is exactly how the S&P 500 performed from the week of May 16, 1986 to the week of Apr. 26, 1996.
You didn’t beat the market.
The $10,000 you invested turned into $20,262. If you hadn’t made any trades you would have made $7,812 more—leaving an ending balance of $28,074. At the time you reinvested, your trade had cost you only $4,112 but it ended up costing you $3,701 more because of the compounded gains you missed. Want to try again?
Activity idea: Have your students play this game 10 times and mark the results in a simple spreadsheet (link to spreadsheet here):
Game # Actual Balance Balance if No Trades Beat Market (Y/N)
So, how did I do? Well, I beat the market 3 out of 5 rounds but on a dollar basis, my balance of $104,036 was less than $300 more than my Balance if No Trades of $103,781. I think that the time compression element of this game makes it easier to beat the market in the game as compared to real-life. Those who sell to get out of the market (at a loss) can find it excruciatingly difficult to get back in and are constantly looking for a “correction” to buy back in.
Tip: Have your students refresh the webpage each time as I got some squirrelly game action when I didn’t.
After their tenth game, have them total up the column market Actual Balance and Balance if No Trades to see if they were able to Beat the Market as measured cumulatively with the ten games. They should also highlight the percentage of times they Beat the Market. Finally, have them reflect on their emotional state while playing the game using 3-4 different adjectives.
This should demonstrate to students:
- To time the market successfully, you must make two good decisions: when to sell and when to buy back into the market.
- The market trends can be extremely difficult to predict; when you think the market has hit a peak, it will often keep going and when you think the market has bottomed, it often goes lower.
- The market often has significant moves up and down which make it that much harder to time.
- Over the long-term, buy and hold is a good strategy.
- The psychological feelings of regret and loss aversion that come from investing in the stock market