The Problem with Market Timing – Part II

April 1, 2019


 “It’s Time in the Market that Matters.”

Last month we examined return rates for three hypothetical investors who were investing $1,000 a year into the TSX Total Return Index for 40 years.  We found that even if you timed things perfectly (which is virtually impossible over a 40 year period) you only had a return slightly better than an investor who didn’t try to time things at all.

This month we explore the more aggressive version of market-timing; selling your entire investment portfolio to cash during a falling market with the intention of buying back-in when the situation improves. 

We looked at the TSX Composite Index over a 40-year period from January 1978 to December 2017.  Two investors start by investing $10,000 into the index.  The ‘market-timer’ sells their entire portfolio at the beginning of every market correction and buys back-in when the situation improves.  Conversely, the ‘fully-invested’ individual stays invested from day one.

We assume the ‘market timer’ doesn’t have a crystal ball and doesn’t execute perfectly.  They are slow to re-invest after every correction.  Subsequently, they cumulatively miss the 10 best trading months over this 480-month timeline.  This is plausible given that many of the best growth periods in markets are those rebounds immediately following a correction. 

The results are very dramatic. The ‘fully invested’ would have nearly three times the portfolio ($487,803 vs $167,355) of the ‘market-timer’ because the latter, in fearing the drawdowns, misses the best trading periods while sitting in cash.  Put another way, the ‘market timer’ had one third the return despite being invested 97% of the time.

This is a hypothetical scenario, but it illustrates the point perfectly.  In attempting to time the market, it’s overwhelmingly likely your timing will be poor and you’ll end up doing the opposite of what you intended; you will sell low (because you’re fearful) and buy back near the next high (because the market’s doing great!).  This can become a vicious cycle and is the hallmark of an emotional-based investment strategy.

As the old adage goes, it’s not timing the market that matters, it’s time in the market.


Warm Regards,

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

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.