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The Most Important Investing Chart You Have To See

Yesterday, a friend visited me. She works as a financial advisor and we were having a discussion about investing.

She mentioned that she had a fellow colleague (let’s call him Mr. Lee) who told her the markets might be choppy in the coming months and that it would be better if she held off investing for the time being. She also added that Mr. Lee has made money for his clients for many years by picking the right moments to jump in and out of the market. In other words, my friend’s colleague had seemed pretty adept at timing the market.

But that’s when I had to ask. What were the kinds of returns Mr. Lee’s clients would have earned if they had stayed invested instead of jumping in and out of their investments based on his suggestions?

You see, it’s one thing to make money, but it’s another to have left even more gains on the table due to poor attempts at timing the market.

The most important investing chart

The chart below shows the 20-year returns an average mutual fund (the equivalent of a unit trust here) investor in the USA had earned. And for me, it’s the most important investing chart any investor has to see.

Source: John Maxfield at

What the chart shows is stunning. For instance, in the 20 years ended 2003, the S&P 500 had achieved an annualised compounded return of 12.98%; the average investor meanwhile earned just 3.51%. The gulf in returns is immense – it represents an ending amount of $114,800 vs. $19,900 for a starting investment of $10,000. And the scary thing is nothing seems to have really improved in the past decade.

DALBAR, the investment research outfit which produced the figures used in the chart above, only recently published a new report on the topic – it showed how the average equity mutual fund investor had earned just 5.02% per year in the 20 years ended 2013 as opposed to the 9.22% annual return achieved by the S&P 500.

In its studies of investment versus investor returns, DALBAR concluded that one of the biggest reasons investors tend to underperform the market was simply because they are just bad at timing the market. In other words, they end up buying and selling at all the wrong times.

So yes – timing the market can still bring you gains as the chart shows. But, those gains may jolly well pale in comparison to what you can achieve if you simply allowed time to be on your side and just invested for the long term, buying and holding shares.

This is also why the chart is so important. It shows us that we’re often times our own worst enemy when it comes to investing and that’s a piece of information which not many might know. I know my friend was certainly unaware – I hope Mr. Lee can be more aware of this too.

Even the pros fail

And in case any of you think that it’s only the individual investors who are poor at timing the market, you might take solace in the fact that even the so-called professionals can’t do it.

Financial writer Mark Hulbert, who runs the Hulbert Financial Digest, a service which tracks more than 200 investment newsletters in the USA, put it clearly in black and white when he penned the recent Wall Street Journal article titled “Calling a Stock-Market Top Is Only Half the Battle”.

To sum up his findings, none of the 81 market timers he tracks have managed to beat a simple buy-and-hold investor over the past 15 years (some have even clocked losses!).

Foolish Bottom Line

The next time you have the urge to want to jump in and out of shares, take a look at the chart above. The next time anyone boasts of being able to make money by dancing in and out of the market, ask him or her to compare their returns with that of a simple buy-and-hold investment (just to be clear, I’m not saying no one can time the market – I’m just pointing out that it’s so much more difficult to do than one can imagine).

The French mathematician Blaise Pascal once said that “All men’s miseries derive from not being able to sit in a quiet room alone.” The same holds true for investors – we suffer from too much action.

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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.