Timing the market vs Time in the market.

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5 June 2018

In sports like cricket, golf and tennis, timing is required for the player striking the ball to achieve the best result. Timing in these sports is a skill most athletes strive to achieve, but with investing timing and more specifically timing the market is something rather to avoid.


What is meant by timing the market?

When an investor tries to “time the market” they want to buy (invest) and sell at exactly the right time to maximise profits and avoid making losses. These investors try to buy when the price of an investment (like a share or unit trust) is at its lowest and then try sell when the price is at its highest. Very few, if any, investors can get this market timing strategy consistently right over time, as nobody really knows which direction the market, or an investment, will take.

It is normal for people to want to make as much money as possible and lose as little as possible, but trying to time the market is generally not a great strategy to follow when making investment decisions.

Why is market timing not a good strategy?

Nobody can accurately predict where a company’s share price, a unit trust or stock market will end up next and thus trying to time the market when investing is nearly impossible.

In 2008 the world experienced one of the worst financial collapses in history due to global stock markets that crashed. Billions of dollars were lost and many big companies were bankrupted due to this global financial crisis. Nobody was able to predict with certainty a catastrophic collapse of this magnitude. 

If market timing, in other words trying to sell before things go bad and trying to buy before things go well, is really such an effective strategy, why then did millions of investors around the world, not see the imminent 2008 market collapse coming and sell out to prevent a wide scale loss of money.

Over the last 90 years the world has seen many big stock market crashes and each time a whole lot of wealth was destroyed by investors trying to time the market through buying and selling at the wrong time.

Is there a better strategy?

We believe “time in the market” and focussing on your investment time horizon (the period that you want to invest for) is a better strategy.

For example, let’s consider two investors - one following a “time in the market” approach (Mr Time) and the other trying to “time the market” (Mr Timer). The market timer wants to be invested in the best performing unit trust each year. The time in the market investor focusses on long-term goals and ignores dangerous short-term performance figures.

The table below shows the performance (growth) that four different unit trusts achieved over a four year period.

Unit trust

2014 performance

2015 performance

2016 performance

2017 performance

A

10%

6%

7%

8%

B

8%

10%

6%

7%

C

7%

8%

10%

6%

D

6%

7%

8%

10%

These figure are for illustrative purposes only

In the beginning of 2014 both investors invest R5 000 in unit trust B and commit to investing for a period of four years, as this fund best matched their investment time period and risk profile as recommended by their advisor.

At the end of 2014 both received an 8% return (growth on their money invested). Unit trust A had a 10% return in 2014, which makes Mr Timer unhappy and therefore at the start of 2015 he goes against the advice of his advisor and switches and buys unit trust A due to its performance in the previous year.

Mr Time however follows a sensible “time in the market” approach and stays invested in unit trust B - focussing on his four year investment period and not trying to chase returns.

At the beginning of 2016 Mr Timer switches again, back to unit trust B as this was the best performer in 2015. The same happens at beginning of 2017 as Mr Timer now believes unit trust C is the better fund. 

At the end of the four year investment period (2017) the following has happened:

 

Performance for 2014

Performance for 2015

Performance for 2016

Performance for 2017

Total average return over 4 years

Mr Time

8%

10%

6%

7%

7.75%

Mr Timer 

8%

6%

6%

6%

6.50%

Over the period Mr Time is better off than Mr Timer by following a time in the market strategy as opposed to a timing the market approach.

One of the main drawbacks when applying a timing the market approach is that most decisions are based on history and what happened yesterday does not necessarily mean it will happen again tomorrow, as in the case of the example above.

Control what you can by sticking to your investment time horizon and goal, forget about timing the market and rather spend time in the market.

Amounts and performance figures used in this article are for illustrative purposes only. Returns or benefits are dependent on the performance of the underlying assets and variable market factors

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