I was talking to a buddy of mine this weekend at a party. He was pretty proud of his recent investment decisions. Several of the stocks he'd been watching lately have been down quite a bit. He'd been a buyer in one or more of these issues as last week's sell off continued through Thursday. On Friday he saw his strategy start to pay off. By party time on Friday evening he was feeling like Donald Trump and Warren Buffet's long lost love child.

His story got me to thinking about the merits of Buy and Hold versus some other strategy of buying. For instance, what about buying when stock prices dip - a form of Market Timing, as my buddy had done?

Now there's no real fair way to evaluate something like this because you always have to look back at the market and pick a hypothetical date to start from. It doesn't matter whether you're a believer in Buy and Hold or in buy when the time is right, there is no single date where both sides will agree is "right" to start from. I decided to use the beginning of the year, this year, for my investigation. It's arbitrary and that's what I like about it. Perhaps neither the Buy and Hold types nor the Market Timers would like that date. That makes it a good enough choice for these purposes.

The other piece of the analysis which the camps will argue over is the choice of security. My buddy's stocks were fairly volatile. He's a gambler at heart. I decided not to go with something quite so risky for first analysis. In this case I decided to use a proxy for the Dow Jones Industrial Average, DIA. It's an Exchange Traded Fund, a basket of securities intended to mimic the performance of the Dow.

The scenario goes like this: Two hypothetical investors start out with $10,000. The first invests all his money on the first trading day of the year. The second one waits for a dip in the market and buys when he thinks the timing is right. In this case our investor #2 purchased on Friday after the market had been down for several days.

So the question is, given the recent statistical return and volatility factors for DIA, where are our two investors likely to end up in a year. Or how about in 5 years?

To find out I ran 10,000 independent and random scenarios for both investors for both 1 and 5 year time frames. In both cases our buy and hold investor came out ahead. In 95% of the cases the lowest one year outcome for the Buy and Hold investor was just under $1000 more than the 95% confidence level upper limit for our Market Timer.

Extend the simulation out to 5 years and our Buy and Hold investor does even better. His $10,000 returned over $21,300 at the 95% confidence level versus our Market Timer's most optimistic $19,700 return.

So obviously the Buy and Hold strategy wins. Well we can't really make that statement, can we? The selection of starting date and the investment security make a big difference. Market Timers will point out that Friday might not be their best choice for when to invest. Or theoretical Buy and Hold investor's beginning of the year purchase worked in his favor. A good Market Timer will try to similarly advantageous dates to invest.

Indeed there are securities choices and investment dates which make this scenario come out the other way. Perhaps further investigation is in order.