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Lesson 5: Does timing the market work?

Investors are used to hearing from the financial media that it’s a ‘great time to buy’ or the ‘ideal time to sell’. Messages like this make up most of the headlines in the money pages. The trouble is, they’re rarely right. The best time to buy is when equities are at their lowest point, before they start to rise in value again. But who knows when this is going to be? It’s just as tricky to spot when shares are at their peak and about to fall. All so-called experts can do is speculate – and as we all know, the chances of them being right more than a few times in a row is near zero. There is no guarantee that past successes will be replicated in future performance. Shares are valued on what the market believes they are worth – that’s the collective wisdom of millions of investors. What’s the likelihood of one ‘star’ fund manager being right when everyone else is wrong? What tends to happen is that human nature takes over and we buy when shares are already high – because everyone else is, which pushes the price of shares even higher. The ‘greed’ motive drives the ‘buy’ impulse. Then the market decides those shares are overpriced, and so begins to sell. We hang on for a while, then the ‘fear’ factor takes over, which drives the impulse to ‘sell’ when those shares are now falling in price – and we lose out on any return. With hindsight, of course, it’s easy to see when we should have got out of the market and got back in again. But until time travel becomes a reality, we can only make judgements based on the data that’s available at the time. In reality, the big stock market rises – and falls – are concentrated into just a few trading days each year. If you trade frequently, and miss those all-important days, it can have a dramatic effect on your portfolio. A US study has shown that missing the best five trading days from 1996 to 2015, for example, could have cost you almost half of the return you would have got by just holding onto those shares throughout the period. And analysis by the University of Michigan found that in the 30 years between 1963 and 1993, just ninety days – three per year – accounted for more than ninety-five per cent of the market gains throughout the period. Trading shares is a zero-sum game. For every winner, there must be a loser. The best and most efficient way to ensure investing success is through slow and steady growth over a long period of time. So it’s time IN the market, not timing the market that is key. Through normal market fluctuations, and even quite significant market crashes, the annualised return of the UK stock market over the past sixty years has been nearly twelve per cent per annum. Doesn’t sound much? Think again. That means if you’d invested one hundred pounds in the stock market in 1956, and left it there, it would now be worth over eighty-five thousand pounds, before costs.