The Problem with Market Timing – Part I

March 1, 2019

 
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 “Buy low. Sell high.”

We’ve all heard sound bites of investment gurus espousing such a strategy.  It’s often referred to as ‘market timing.’  The idea seems simple enough; when the market is high, you should avoid investing more money (or sell everything) and wait until things get cheaper.  Conversely, if the market is cheap, now is the time to put money to work (or buy back in).

In reality, without hindsight, no one knows where we are in a market cycle.  Absent a crystal ball, trying to ‘time the market’ is more like gambling than investing.  And the facts are stark.  Market timing overwhelmingly increases the likelihood of poor returns.

Time invested in the market is more important than trying to time the market.  Nevertheless, many people (advisors included) believe they can do just that. 

Let’s look at a recent example to illustrate this point.

We looked at three hypothetical investors, each who invested $1,000 a year in the S&P TSX Total Return Index for 30 years (1989 – 2018). The ‘perfect timer’ bought $1,000 every year when the index was at the lowest price. The ‘bad timer’ did the opposite and bought $1,000 at the highest price.  Finally, the ‘average timer’ split their $1,000 investment into 12 monthly payments and didn’t try to time the market at all.

The results are very interesting. The difference between the perfect and worst market timer is only 1% average annualized return over 30 years.  Even more impressive was the investor who did not try to time things and who finished just slightly behind the perfect market timer.

The chances of executing a perfect market timing strategy over a long-time horizon is extremely difficult and probably impossible and with a return only marginally better than someone who just averages into the market, why take the risk of permanently impairing your returns with bad timing? 

Next month we will look at an example of an investor who attempts to fully exit the market with plans re-enter at a later date.

 

Warm Regards,

Joe Basque, BA, CFP® | Financial Planner & Investment Advisor
HollisWealth®, a division of Industrial Alliance Securities Inc.
j.basque@westmountwealth.com

This information has been prepared by Joe Basque who is an Investment Advisor for HollisWealth®. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of HollisWealth.  HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.