So much time and money is spent trying to beat the market.
I get it. Investing results tend to be best when you can minimize the tinkering (do nothing) and remain diversified (accept you will have losing investments as well as winning ones).
But that is not natural to most people.
1/. Most people want to do better than the index. They think that average is no good. But index returns ARE better than average.
2/. When there is something happening in the markets, or in life in general, most people’s natural reaction is to do something to stop the bleeding. But that often results in even worse results. It doesn’t feel right to sit back and do nothing. But that is exactly what more people need to be doing. Assuming you have a good allocation and investment plan in the first place.
The cost of timing the market
According to JP Morgan, the S & P 500 returned 9.7% between 2004 and 2023.
If you missed out on just the 10 best days, your returns would be just 5.5%. 10 days over a 20 year period. 10 days out of 5,040 trading days. 0.2% of the days.
Or if you missed the 20 best days, your returns were just 2.8%!. 0.4% of total trading days out of the market and your returns are no better than money in the bank.
If you missed out on the 40 best days (0.8% of total trading days) then you would have less money than what you started with.
The best days often come during periods of volatility too or immediately after the worst days. The times when someone is most likely to be out of the market! The research noting that 7 of the 10 best days occurred within just 2 weeks of the 10 worst days.
So if you are leaving the market when times are tough, there is a very good chance you will be out of the market for many of those best days too.
Most share returns are no better than money in the bank
In addition to so few days having an outsized impact on returns, so too can missing out on the best investments. And by trying to pick and choose your investments to avoid holding onto losers, you run into a higher chance of missing out on holding the winners too.
A US based study found that 58% of shares failed to beat cash over their lifetime. 38% only just beat cash by a small amount. This leaves just 4% of shares that are responsible for the higher average returns you see shares generating over cash. The odds of knowing these ahead of time are not good.
The lesson here is not to not invest at all. The lesson is holding onto all shares (winners and losers) ensures you invest in the winners. And that by remaining in the market, especially during times of volatility, ensures you don’t miss out on the best days.
To help explain why it is so hard to beat the market, I will briefly discuss what needs to go right for you.
What needs to go right when timing the market?
1/. You need to KNOW what is going to happen. Not just guess, but know. You need to know something is going to happen that the general populace do not know about. For example, it’s easier to say that retirement homes will be big business with people getting older but what is not easy is knowing it is going to be better or worse than what most people expect.
2/. You need to know when it is going to happen. If you are predicting an event that is going to tank the share market, you need to know when exactly it is going to happen. It is not enough to pick the event. Many have been predicting big recessions since 2018 and it hasn’t come to pass. They would have missed out on many years of great returns.
3/. You need to know the extent of the event. You’ve predicted it is going to happen and when but how big or small is the event going to be? If you get that wrong then you will either take out too much money or not enough.
4/. You have to know how millions of investors around the world will react. Maybe they were not as surprised by an event as you hoped or thought, resulting in the share market trucking along as normal with no significant drops. One such example will be when most people thought the economy would tank at the start of Covid outbreak, yet it did not. Investors did not react as negatively as predicted.
5/. Then you have to decide when to sell or buy. Too late and the event becomes public knowledge. Too early and you miss out on days, weeks, months, or even years of good times in the markets.
6/. Then you have to decide how long the event will last. Buy back in too early or sell too late and you will lose money. Buy back in too late or sell too early and you miss out on the best days in the market. There is often a very short window between the best and worst days and when most people are thinking run for the exits, or when it is least expected, the market can turn on a dime.
7/. You have to then know how millions of investors will react again towards the end of an event.
8/. Finally deciding when to sell or buy back in again.
It’s not ok for just a few of the 8 points to go right. You need all 8 points to go exactly right.
You could get extremely lucky with a few points, but to get it all right consistently and you should go out and buy a lotto ticket because you are blessed.
And there is always something happening in the markets. Getting things right once is no reason to celebrate. If you are in the market timing game, you will need to get it right over and over again.
Many of us have investment timeframes of many decades.
That is a lot of time, risk and luck involved.
Fight that natural instinct to do something.
Take the lazy route for once in your life. As long as you have a good plan and are invested appropriately, sit there and do nothing.
I help people from all walks of life develop an investment plan that allows them the best chance of holding onto the winners and being invested when it matters the most. If you need help with your investment planning, then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here