Timing the market…is there such a thing?

Simply put, the theory behind market timing is to buy near a low and sell near a high. All sorts of algorithms have been developed to help traders determine this vital point but in reality the idea is a mere myth and there is no clear cut formula or pattern that can be used to determine the ideal point to buy or sell a particular stock.

Volatility

The discussion around market timing is always more prevalent during times of volatility and uncertainty. The SA stock market and currency has seen its fair share of this over the years. Fund managers and analysts are tasked with the role of pricing in changes and expected market movements and although a lot of time and number crunching goes into calculating this, some changes or events that take place catch them off-guard and are impossible to forecast. A few examples of these are:

  • Brexit
  • Donald Trump’s presidential win
  • Steinhoff collapse
  • Resilient insider trading accusations
  • Guptagate

When unexpected events take place and investors are affected negatively, emotions are high and the natural thought process is: “where should I move my money to?”. Although this is expected, this reaction is almost always the wrong one and reacting after a major shift has taken place usually places the investor at a greater disadvantage. Here are some of the reasons why (courtesy of Wouter Fourie – Ascor Wealth Managers):

  • Fees: Switching investments from one type of stock to another, or from equities to money market, will invariably attract fees and this will cancel out some of the future growth that the new investment will attract.
  • Uncertainty: Just as you did not foresee the first major market move, you may not see the next one and subsequently lose out on growth or lose additional invested capital if your new investment also declines unexpectedly.
  • Taxes: Cross border transactions and transactions where you have made a capital gain will attract additional taxes, which lead to an additional loss in your investment.
  • Delay: It takes time to move your capital from one investment to another and if you are actively managing your portfolio, it takes time to react to any market movement. This will inevitably mean that you will lose more capital as the markets decline before you have time to react and you may lose some of the growth potential in the market when you then react and invest in a stock, fund or market that is growing well.
Missing out on growth

Market reversals are sometimes quick and unpredictable and missing out on growth is synonymous with trying to time the market.

As the investment chart below shows (courtesy of Russell investments – US stock market), an investor who missed the 10 best market return days during the period analysed (May 1995 to July 2017) would have given up a third of the portfolio return they could have earned if they had been invested for the entire 22-year period:

If we extend the number of ‘missed days’ to 20, 30, even 40, the difference is striking!

Source: Russell Investments (ASX All Ordinaries Accumulation Index).

Deciding on an investment strategy and sticking to it

Research shows that investors who stick with a disciplined long-term investing strategy tend to outperform those who constantly jump in and out of the market.

Market volatility as mentioned above and sometimes unexpected personal circumstances, can present a challenge and this is where it’s important to remind yourself of the strategy you’ve implemented and the goal you’re trying to achieve. Let’s look at an example:

  • You’ve recently become the proud parent of a new-born child and you immediately put in place a tertiary education saving fund. The term of this investment is therefore approximately 18 years with the bulk of your funds invested in equities. The first 3 years of the investment yields inflation beating returns and you’re proud of yourself for clearly doing the right thing. The fourth year however is a rather challenging one with equities achieving very little growth (below inflation). You’re now faced with a dilemma, “should I switch or do I stay invested”? The key factor here to help with your decision is the 14 years you still have left of your investment term. In other words, there’s plenty of time for the market to recover so just sit tight and let time do its thing.

 

Steps to follow to help you achieve your investment goal and not be influenced by “noise”:
  • Be specific and identify your goal.
  • Understand the time frame needed and decide on an investment strategy that suits your risk appetite.
  • Familiarise yourself with the possible scenarios you’ll face over the term and very importantly what your reaction should be to each scenario.
  • Review your strategy on a regular basis and only consider making changes if really necessary (i.e. changes in your lifestyle or a personal situation).

Spend time in the market rather than trying to time the market. Invest steadily and gradually over the years even during the volatile times and sell gradually in retirement. This approach will help enhance your profits and minimise your losses and in most cases it will also prevent hair loss!

Compiled by: Miguel Da Fonseca