Market Timing and Investing

Market timing is trying to predict the movements in investment markets. More often it is about trying to predict the rise and fall of the share market with the view to selling before the market falls and buying just before it rises.

One of the famous quotes about market timing comes from John Bogle, founder of the Vanguard Group, one of the world’s largest investment managers. He said

“After nearly fifty years in the business, I do not know of anybody who has done it (market timing) successfully and consistently. I do not even know anybody who knows anybody who has done it successfully and consistently.”

Neither do I.

Trying to time the markets is similar to share trading – it’s very risky and can be costly if you get it wrong.

Watch the spikes

The stock market does not grow in small, regular daily increments. It has days where it may go up 3%, days where it goes sideways, and days when it drops. It’s hard to tell what’s going to happen in advance on a consistent basis.

If you invested in the Australian shares index 10 years ago, you would have averaged 6.39%pa to January 2009. However, had you missed the 5 best days over the 10 year period, your actual return would have declined to 3.80% – a drop of almost half. If you missed the next 5 best days, your returns drop further to around 1.70% pa.

There are a couple of observations to make from the graph:

  1. A small number of days are responsible for a large amount of the returns you make. If you miss those days, you miss the bulk of your returns.
  2. No-one can pick when those best days will happen.

This data is current to January 2009, so it is a poor 10 year return for Australian shares. Over a more ‘usual’ 10 year period, the average returns are usually higher, but the same concept applies – missing the best days severely affects the returns.

Chasing your tail

The 2008 Qualitative Analysis of Investor Behaviour (QAIB), published by Dalbar, Inc., for the 20 years ending December 31, 2007 indicates that the average equity mutual fund investor achieved an annualized rate of return of 4.48 per cent, compared with the average equity mutual fund rate of return of 11.81 per cent over that same period. This means that the average investor is actually underperforming his or her own investments.

How did it happen? What they’ve found over the years is that the average investor buys into shares after they’ve had a few years of good returns, and then sells out soon after they’ve fallen in value. They’re missing out on a large percentage of the good returns and in the process sabotaging their long term returns.

Action Steps

We don’t believe that it is possible to consistently time the markets. We believe there’s a greater risk in not being invested, than in being invested and suffering a decline in your investments.

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