Timing the market is an attractive concept. At its core, it entails selling at market tops and getting in only when the market bottoms out. With the Straits Times Index (SGX: ^STI) sitting around 3,300 points currently, Singapore’s share market barometer is still a good 15% lower than where it was at its all-time high of near 3,900 points some seven years ago on October 2007. If an investor had managed to sell near the top, and get in at the bottom – when the STI had fallen by two-thirds to around 1,500 points in March 2009 – his or…
Timing the market is an attractive concept. At its core, it entails selling at market tops and getting in only when the market bottoms out. With the Straits Times Index (SGX: ^STI) sitting around 3,300 points currently, Singapore’s share market barometer is still a good 15% lower than where it was at its all-time high of near 3,900 points some seven years ago on October 2007.
If an investor had managed to sell near the top, and get in at the bottom – when the STI had fallen by two-thirds to around 1,500 points in March 2009 – his or her returns would have been way better than just simply hanging on to the index through an index tracker like the SPDR STI ETF (SGX: ES3).
But as attractive as market timing sounds in theory, it can be one of the hardest things for any investor to do.
According to investment research outfit DALBAR in its latest annual Quantitative Analysis of Investor Behaviour (QAIB) study, the S&P 500 (a broad share market index in the USA) had gained some 9.22% annually for the 20 years ended 2013. Meanwhile, the average American investor in US equity funds earned just 5.02%.
That gulf in returns is hardly a surprising statistic. DALBAR has produced its QAIB report for many years and in 2013, its study showed how the average American equity fund investor had trailed the S&P 500’s returns badly for every 20-year period ending 2003, 2004, and so on till 2012. The main reason for investors’ underperformance is explained by DALBAR in its 2013 report:
“Analysis of investor fund flows compared to market performance further supports the argument that investors are unsuccessful at timing the market.”
So the long story short is that the average equity investor – that is, an average joe like you and me – is just horrible at picking share market tops and bottoms. But, can the professionals – organisations that run investment newsletters advising their clients on how to time the market – do it?
As it turns out, even they can’t do it. I found that out after chancing upon financial writer Mark Hulbert’s recent Wall Street Journal article titled “Calling a Stock-Market Top Is Only Half the Battle”
Hulbert runs the Hulbert Financial Digest which tracks more than 200 investment newsletters in the USA. In his article, Hulbert shared that over the past 15 years, only 11 out of 81 market-timers “actually made money during the bear market that began after the Internet bubble burst in March 2000 and ended in October 2002.” Sadly, those 11 who made money then subsequently lost so much that they’ve clocked annualised losses of 0.8% since March 2000. Hulbert then added that although the other 70 market-timers managed to earn an annualised return of 3.6% since March 2000, the figure “still trails the gains of buy-and-hold investors.”
A big part of the reason for the abysmal long term performance of the market-timers – even for those who earned money during a severe bear market – is that it is exceedingly tough to know when to get back into the market after getting out. Or, as Hulbert wrote in his article:
“It’s hard to decide when the market has peaked and it’s time to get out. It may be even harder to know when the damage is over and it’s time to get back in.”
The next time you’d like to time the market, take a look at the overwhelming statistics which suggest that such an approach to investing would very likely be a fool’s errand.
Charlie Munger once said that “Investing is where you find a few great companies and then sit on your ass.” Even if we don’t always invest in “a few great companies”, Munger’s wisdom of sitting on our ass is still not lost.
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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 writer Chong Ser Jing doesn’t own shares in any companies mentioned.