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It’s a win, lose or a draw – trying to time yourself to wealth is mostly futile

2020, the year of the COVID-19, a sudden black swan event has sent many investors scurrying for cover. Even worse, many have tried to ‘time’ their way through the 2020 maze.

With daily Covid-19 news dominating the news and recent spikes in volatility on world stock markets, you may have heard of renewed interest in market timing, once again. Add in a sprinkling of US politics (especially around the 2020 elections), amongst the myriad of other global events and the temptation to ‘time’ your way in-and-out just increases.

Your average financial advisor or news commentator will probably not use that actual term. What they will talk about is whether you should sell some or all of your equity investments because of the economic effects of the coronavirus and the ‘possible’ subsequent effect on the markets.

All of this is what is termed ‘market timing’ in the lingo of the investment trader — in short: holding back investment or taking some or all of your money out of the market when you anticipate a fall.

The word ‘anticipate’ indicates the first problem with this approach. Most people whom we encounter take their money out during or after a fall — as many actually did in March. Especially during the last 1/3rd of March! They are doing the equivalent of driving whilst looking in the rear view mirror (or at best, out of the side window of the car). You need to look out of the windscreen in order to have the best chance of driving safely. The trouble with doing that in terms of the stock market is that the visibility is often so poor, it feels like driving in fog.

Think about this approach and you will see that it’s mostly a futile endeavour. Equity markets are 2nd derivative systems by nature. What this means is that in order to successfully implement such market timing strategies you not only have to be able to predict future events — such as the next interest rate hike, a regional war, an oil price spike, the impact of a virus, the outcome of a major election etc. — you then (and this is the tricky part) also need to know what the market was actually expecting and finally how it will react, so as to get your timing just right. Good luck!

Take the Dow Jones Index, which we can use because there is long term data available from 1970-2020 i.e. the last 50 years. This half century covers crises, crashes, bull and bear phases and rampant inflation (now deflation). We could describe this half century as a good sampling period.

So, let’s apply two strategies over these 50 years: One is to invest an equal amount every trading day for 50 years. This would be comparable to any of us who contribute monthly to an RA or a unit trust. The 2nd strategy is similar yet different. We invest on a daily basis as in the first strategy, but we stop investing when the market falls. We then hang onto the cash and we only invest again when the Dow Jones makes a new low. We call this the ‘absolute bottom buying strategy’.

Over the 50 year period, the second strategy would have been performing neck-on-neck with the market. But think of the time and effort you would have to spend monitoring markets to get those calls just right. And this, assuming that you make no errors along the way. In reality, attempts to implement the second strategy will almost certainly cause harm to your net worth as nobody has perfect foresight. In your desire to time the markets, you will stop investing, or worse, sell and take money out when you expect the market to go down, and instead it goes up.

In summary: When it comes to the so-called ‘art’ of market timing there are only two types of investors: those who can’t do it, and those who now know they can’t do it.

It’s safer, more effective and less stressful to not try ‘timing’ yourself to wealth.

Oliver Dresner

Head of wealth & Advisory


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