21st December 2022 - Sean Banks

The Futility of Market Timing

As we approach the end of 2022 and what has been a rather extraordinary few years it occurs to me that now, more than ever, we need a gentle reminder about the futility of ‘market timing’. A global pandemic, lockdowns, conflict in Europe, fuel prices, food shortages, record CPI figures – all in the past three years, and now a recession to cap it off. I think we are all in need of a break.

Amidst this, things have been happening in the investment market. The extract below is a headline from a recent article in the Financial Times. To me at least, it may as well read: Once again, humans do the wrong things, at the wrong time, for the wrong reasons with their investments.

Financial Times (2022) [1]

Before we unpack this, allow me to introduce you to something called Recency Bias. According to Wikipedia, Recency Bias is a ‘cognitive bias that favours recent events over historic ones. Recency bias gives “greater importance to the most recent event”, such as the final lawyer’s closing argument.’ 

Think of the recent FIFA World Cup final, touted by many as ‘the greatest football match of all time’. Instantly forgetting all the incredible games that have come before.

The past few years have been an extreme anomaly in the context of history; compounded by a media determined to make every day a bad news day. It is all too easy to get caught up in the here and now. But as long-term investors, we must keep a wider view and maintain a long-term perspective.

“Risk comes from not knowing what you are doing.” – Warren Buffet

On to “market timing” then. Just as an unfathomable number of people have sold out of their portfolios so far this year, thus throwing their long-term investment plans into the furnace, many will now be anxiously waiting for the best opportunity to buy back in. Inevitably, of course, they will be too late.

It is impossible to say where the markets will go next in the short term, and I’m yet to hear of anyone who can consistently make accurate predictions about the future. Having studied some of the world’s greatest investors, they know this too.

“Truth be known, forecasts aren’t worth very much, and most people who make them don’t make money in the markets.” – Ray Dalio

What we can be more certain of, however, is that markets reward patient owners of the World’s Greatest Companies in the long run. Going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days each decade, the total return would stand at 28%. On the other hand, if the investor held steady through the ups and downs, the return would have been 17,715%. In short, if you’re not in the market when prices go down, you won’t be rewarded (and then some) when prices go up [2].

The key is to remain patient and allow your investments to work their long-term magic. It certainly isn’t easy, but patience and optimism are two key ingredients for long-term investment success. As a long-term investor, your outlook should be focused on where you think markets will be in 5, 10, or even 30 years from now. Not in 5 weeks or 5 months’ time.

One of the main reasons people make mistakes with their investments, is they don’t know the answer to “how much is enough?”. Having a financial plan in place offers great peace of mind in answering this question and vastly improves the chance of a successful financial outcome.

I’ll leave you with this from Benjamin Graham ‘In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.’

[1] Financial Times (2022) – UK funds set for first year of net outflows in over a decade

[2] CNBC Markets (2021) – This chart shows why investors should never try to time the stock market

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Risk warnings

Please note: This article is distributed for educational purposes. It should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author. It does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

The value of investments can go down as well as up and you may get back less than the amount invested.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Errors and omissions excepted.

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