Trying to time the market could be hindering you from doing better today!

A man holding a bunch of cash he has hidden.

In this day and age, with information being available at our fingertips, we are exposed to many conflicting ideas regarding investing. This information overload causes most investors to feel nervous about getting into the markets. Instead, many investors find themselves siting on the sidelines attempting to time the market. This is a lost opportunity as the longer you wait on the side lines, the longer your money is not capitalising on any growth or compounding interest.

It can be a very daunting prospect as to when is the best time to get into the market and it’s a very common question for most potential investors. So, when is the best time to invest? should I invest now or wait?

There is a theory that has coined from a 1960’s Ph.D. dissertation by Eugene Fama (Nobel Prize in economics, 2013) called the efficient market hypothesis which concludes that at any given time an asset’s prices fully reflects all relevant information. Therefore, securities always trade at a fair value on stock exchanges and it is nearly impossible to predict when is the best time to enter or exit the market. It is evident that neither individual nor professional investors can outperform the market consistently over long periods of time. This has been backed by studies done on fund managers, active traders, and other institutional investors, who have failed to find persistent outperformance that was not caused by luck or being in the right part of the market at the right time.

Most investors, however, do just the opposite, something that financial planners have always been warning them to avoid, and thus lose their hard-earned money in the process. Warren Buffett the most successful investor in the world, once said, “the only value of stock forecasters is to make fortune-tellers look good. Even now I continue to believe that short-term market forecasts are poison and should be kept locked away from children and also from grown-ups who behave in the market like children.”

Common investor’s whom attempt to “beat the market” may find themselves falling short, either missing the ‘ideal’ moment and sitting on the sidelines over long durations playing the waiting game or never even getting into the market. Only select few are lucky enough to catch the wave.

Princeton Economist Burton Malkiel, whom is famous for writing the classic finance book ‘A Random Walk Down Wall Street’ also concurs with the theory by saying “I have never known anyone who could consistently time the market and in fact never known anyone who knows anyone, who was able to consistently time the market.”

“Time in the market, not timing the market” is the rallying cry for buy and hold investors.

The graph below is a mere representation of the effects an investor would have if the investor missed out on the best 25 days only, the worst 25 days only and the best and the worst 25 days (of 11,620 days) since 1970 as opposed to having invested throughout.

If the investor managed to miss all 25 best days, the returns would have dropped from a 6.7% per annum to a 3.4% per annum whereas the wizard that manages to miss the 25 worst days would have gained on average 11% per annum over the period.

Growth of $100

The graph above is more of a representation of what could happen and not a suggestion that it will be easy or even possible to miss all the 25 worst days and be invested during the 25 best days. A more interesting observation can be made from the data collected above which is represented in the graph below.

30 Day Standard Deviation

Stock market graph deviation

Based on the graph above, the worst 25 days and best 25 days tend to cluster. The green dots represent the 25 best days and the red dots represent the 25 worst days. Furthermore, they cluster during volatile markets. All 50 of these days occurred when volatility was above average (the black line). Therefore, missing the worst days and being in the market for the best days is nigh on impossible.

The most important thing is to understand the risks inherited in whatever you’re doing as trying to time the market during these very risky times could potentially leave investors with a bad taste in their mouths.

In the long run, disciple breeds success. As we have seen, markets move in cycles and over short periods, markets can be more volatile and result in a wide range of positive or negative returns. The key takeaway is the longer you stay invested, the greater the probability that your investment will generate a positive return. As shown in the graph below, investing in global stocks for periods of 12 years or more has resulted in no negative returns.

Chance of negative returns when invested in global equities for different durations

Investment is not just about picking the best stocks or even asset classes nor is it about timing the market or concentrating funds in a specific market sector. Real results are achieved through compounding performance over long time frames; increasing returns while lowering risk throughout this period is best achieved with diversification across stocks, sectors, and asset classes – a short-term approach increases risk and can significantly impact your overall wealth plan.

Chance of negative returns when invested in global equities for different durations

As the above graph shows, over time the ups and downs of asset classes tend to even out and the gap between the highest and lowest returns closes. A higher return over time can be achieved for a lower level of risk by combining multiple asset classes.

So, you should never try to time the market. In fact, nobody has ever done this successfully and consistently over multiple business or stock market cycles. Catching the tops and bottoms is a myth. It is so till today and will remain so in the future. In fact, in doing so, more people have lost far more money than people who have made money.

The underlining statement that should be taken from the article is that “Time in the market, not timing the market” reduces the risk of investors losing their money as well as creating sustainable growth over the long term.

So, what is stopping you from starting today?

What our clients say…

I had no experience in working with a financial advisor or wealth management group. I also did not have the time or interest to research information myself. It has been a pleasure to work with John and Steve, as they have guided me through my journey of starting an investment plan for my future. I would highly recommend Nexus for anyone who would like to grow their wealth and learn about the process while doing so.

It has been a pleasure working with John. My first contact with him was over the phone when I was really overwhelmed with multiple decisions I needed to make to clean up my finances. He has provided clear and concise guidance to both myself and my partner reducing the stress around changing things for the future. His presentations are clear, he takes his time and really goes above and beyond what he needs to do in order to please his clients. I have since referred several of my close friends and family to him following my encounter, which is not something I do often. John has spent time ensuring we are happy with the service in order to keep us as long term clients and this is something that myself and my partner really appreciate and it is difficult to find these days.

John has been working with my partner Jarryd and I for roughly six months to one year now, we are both young professionals and were looking to buy our first house. Obviously not knowing anything about the property industry or setting up long term wealth in general we really wanted to set ourselves up for the best chance of success. After meeting with John and the team at Nexus there was no question in our minds that we were going to utilise their services. John has spent copious amounts of hours with us imparting his wealth of knowledge and carefully guiding us to now having just signed the contract on our first property. From the very first meeting with John we felt extremely comfortable. He has made making such a huge decision as easy as it possibly could be and we could not recommend his and Nexus’s services more. Jarryd and I are both looking forward to a long, mutually beneficial relationship with John and the team.

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