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Face It…Jumping In And Out Of Stocks Just Doesn’t Work

Here at the Motley Fool, you will often hear us say that ‘market timing’ is a sucker’s game. After all, we are strong proponents of long-term investing.

But while it is one thing to know that the odds of success in timing the market – jumping in-and-out of shares over short spans of time – are bad, it is quite another to see the effects of inevitably poor market-timing on an investor’s long-term wealth.

According to my American fellow Fool John Maxfield, Dalbar, a provider of investor-performance studies, came out with a recent report titled Quantitative Analysis of Behaviour 2013. It showed how American equity-fund investors had trailed the stock-market badly over extended periods of time.

The Dalbar report had studied the average annualised returns for equity-fund investors over rolling 20-year periods from at least 2003 to 2012 (i.e. the study measured the annualised returns for an investor over 20 years ending on 2003; over 20 years ending on 2004; over 20 years ending on 2005 and so on).

The study showed that the average equity-fund investor had annualised returns over 20 years that were at most half that of the S&P 500 Index – a broad measure of the American stock market – in every single year from 2003 to 2012.

For instance, for the 20 year period ending on 2003, the average equity-fund investor had annualised returns of 3.51%. A $1,000 investment for the investor over that 20-year timespan would have become $2,000.

But in that same period, the S&P 500 grew at 12.98% per year and the $1,000 investment, dunked into the index, would have turned into $11,500. That’s not a trivial difference!

But what caused investors to perform so poorly? The main reason given by Dalbar, according to John, was that “investors are unsuccessful at timing the market.

When investors try to time the market, they are inevitably trying to trade shares actively over short periods of time in an effort to capture each swing in the market. Unfortunately, us humans are just bad at predictions in the financial markets and active trading, for whatever reason, has been a loser’s bet.

In other words, the odds are basically stacked against a market participant who chooses to ‘invest’ by flitting in-and-out of the market frequently. But yet, many try.

Thing is, there can be a better way to ‘play’ the stock-market game and that is to incorporate time into our investing framework and let it work its magic.

I’ve shown how, historically, the odds of losing money in the Straits Times Index (SGX: ^STI) can be dramatically reduced simply by extending one’s holding period.

That’s not all. Individual shares like Jardine Matheson Holdings (SGX: J36), Jardine Strategic Holdings (SGX: J37), and Super Group (SGX: S10) have all given investors returns in excess of a 1,000% since Jan 2003.

All the investor had to do was to buy and hold their shares through all the troubles of the world, which could not disrupt the strong underlying fundamentals of those businesses.

Foolish Bottom Line

I sometimes feel like a broken record with my incessant harping on the merits of time in investing. But in the words of my fellow Fool in Singapore, David Kuo, “The Truth is always worth repeating.”

Billionaire investor Warren Buffett once said, “Time is the friend of the wonderful business, the enemy of the mediocre.” I would add that time is simply the friend of the investor.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Super Group.