Most investors – at some time – will be either tempted to time when to be in or out of equity markets – or wish they had when markets fall. After all, it would be great to be able to capture the upsides and avoid the downsides. Sadly, this is wishful thinking.
Investors often underestimate the speed and magnitude of the movements that markets make, although the very material double digit daily moves around the Covid-crisis (March 2020) provided a useful lesson. In fact, a small number of days account for much of the market movement over time. Identifying in advance which those days are – either to be in or out of the markets – is an extremely high-risk gamble and the chances of long-term success are rare.
An analysis of missing the best days in the market (Albion, 2023) provides some food for thought, as the graph below highlights:
Whilst these types of study imply a binary approach to being ‘in’ the market (invested in equities) or ‘out’ (holding cash), which is a somewhat unreal scenario, it is evident that a few good days, weeks or months drive the bulk of market returns and missing them can be costly. In real money terms, just missing the best 30 days across this 30-year period delivers only 17% of the total rewards that the market delivered if invested every day.
Likewise missing the worst 30 days would be highly beneficial, yet the ability to pick them does not seem to show up in the data. The October 2022 Liz Truss/Kwasi Kwarteng ‘mini-budget’ provided evidence of just how quickly new information can impact markets, in that case the bond market.
Being right is quite a challenge. Being wrong can be very costly. The odds of success in market timing are slim. We do not take the gamble.
A seminal piece of UK research (Cuthbertson et al., 2006) concluded that only around 1.5 % of UK equity funds demonstrate positive market timing ability.
The Nobel Laureate Professor William Sharpe agrees:
‘An [investor] who keeps assets in stocks at all times is like an optimistic market timer. His actions are consistent with a policy of predicting a good year every year. While such a manager may know that such predictions will be wrong roughly one year out of three, such an attitude is nonetheless likely to lead to results superior to those achieved by most active market timers.’
Stay invested!