The problem of trying to time the market

Thomas Robert Dewar, a Scottish whisky distiller from the 1800s, coined the phrase ‘sometimes doing nothing is doing something’.

While Mr Dewar was referring to the whisky ageing process where the unique flavour is developed, the phrase also applies to investments, said Gyongyi King, chief investment officer at Alexander Forbes Investments.

“Investors’ emotions see-saw when markets go down. Their emotions could drive impulsive investment decisions that ultimately, like the event that sparked them, end in undesirable outcomes.

“When markets crash, feelings of doubt and uncertainty intensify, and investors scramble to protect their hard-earned savings. This is when you see investors rushing to cash in their investments or to change their investment strategies – cash being the preferred destination.”

But what if their actions are mis-timed, or market conditions improve and investors unintentionally miss one, two or ten of the best days in the market?

What impact would this have on their investment over time?

“Historically, we’ve seen the markets recover significantly following drastic downturns. They often go onto post inflation-beating performance returns,” said King.

An example.

The chart below is based on the South African stock market, represented by the FTSE/JSE All Share Index from 1 April 2005 to 31 March 2020.

It shows the impact on investments when investors try to time the market and, in the process, miss some of the market’s best performing days.

  • Investor 1 kept her money invested for the entire 15-year period. The R100,000 she invested grew to R519,422.
  • Investor 2 missed the 10 best trading days in the market in the 15 years analysed. The R100,000 he invested ten years ago only grew to R286,228.

Investor 1’s investment grew to almost double of what Investor 2’s investment grew to. This is because Investor 2 missed the 10 best trading days by either trying to time the market or being out of the market completely.

Even more extraordinary is that if Investor 2 had missed the 40 best days in the market, his investment would only be worth R88,635 – less than the amount (R100,000) he invested 15 years ago.

“It goes to show that time spent invested in the market is much more important than timing the market.

“The moral of this investment story is much the same as Mr Dewar’s philosophy for making whisky,” said King.

Changing an investment strategy that is designed with the long term in mind because of short-term volatility often ends in missed opportunities or even losses.

“If you stick to your long-term investment plan and do nothing when others are prematurely opening the proverbial cask of whisky, your retirement years could very well be spent savouring a perfectly matured single malt,” said King.


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The problem of trying to time the market