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.
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:
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):
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).
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:
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