Market timing – how much is really at stake?
Trying to spot an opportunistic moment in which to invest? Even if your timing was perfect, the results might not be quite what you expect...
Equity investors have been on a roller-coaster ride over the last six months. We have seen two big sell-offs followed by similarly impressive rebounds. The experience has been a useful reminder that – if history is to be relied upon - attempting to time the stock market is potentially dangerous.
If you read or watched any financial media over the New Year, you would have come away convinced that equities were doomed. And yet, after the worst December in decades, many major markets are now back within a whisper of all their all-time highs.
Historic data suggests that market timing may not be all that important over the very long term (which is the time horizon that we and many of our clients are focused on).
We recently came across the below chart that neatly illustrates this point. This was originally produced by Albert Capital, a London-based asset management firm and featured on Bloomberg.
The chart illustrates what would have happened to a hypothetical investor who put £1,000 per year into the FTSE 100 for each of the last 30 years, at either the lowest or highest closing price of the year. If he had paid the lowest price, he would now have a pot worth £121,000. If he had paid the highest price, he would have accumulated £97,000.
Yes, there is some difference. The market wizard who timed his purchases perfectly would be 25% wealthier.
But remember, this is what happens buying at the very best or very worst levels of the year. Most investors won’t be putting money in to the market on just one day per year.
Even if they were, the chances are slim that they would be lucky to get in at the lowest price in any one year - let alone consistently over 30!
This means that in a more realistic case, the difference between getting it right and wrong will be much smaller.
The data also shows the risks of selling investments and being out of the market during recoveries. The resulting failure to participate in gains can be very costly indeed. Those investors who sold at the bottom of the December 2018 slump, for example, missed the resurgence of January and February 2019 and would have crystallised a significant loss.
We work with our clients to develop a sensible approach to implementation that will allow us to phase their investments over an appropriate period of time. And when it comes to making more granular investments (for instance, an actively managed fund or an individual stock or bond), we still think that our experience and judgement can help us benefit from timing.
For investors focused on the very long-term, paying a little over or under the average price in any given year won’t make a meaningful difference. Working with a manager you can trust, and having the right long-term strategy in place, is far more important.