Latest News › Time in rather than Timing

“Investment results largely depend on how one behaves near the top and near the bottom” John Maynard Keynes

We are all familiar with the sense from the trading floors of the world financial hubs, as traders stand with a phone on each ear, shouting with Hollywood ‘sell high and buy low’ being the end goal.

 This is a world away from the average investor and the objectives they are looking to fulfil with their personal investment portfolio. Whilst it may in fact be possible for an investor to ‘sell high and buy low’, in practise, the chances of timing it right are slim. The real question is over the long term, can this increase investment return?

Let us begin by looking at the dynamics of a stock market cycle; the very fact the cycle exists in the format it does is because it is impossible to predict. If it was possible to call a cycle, then more people would do it and the cycle would not be as extreme.

Historically, the best and worst trading days tend to cluster in brief time periods, often during periods of heightening uncertainty and distress. From 1928 to 2008, of the best 20 trading days during the period, 8 occurred within 10 days of one of the 20 worst days (Vanguard, 2010).

As you would expect off the back of these extreme moves in the market, the effects of timing are extreme. Missing either the 20 worst or 20 best trading days in the 81 year period from 1928 to 2008 (or 0.1% of the 20,340 total trading days), would have increased or decreased an investor’s return by approximately 50% (Vanguard, 2010).

However, this is not to say we cannot make changes to our investment portfolios to take advantage of opportunities created by the market. This is done not through market timing, rather through the practise of Tactical Asset Allocation (TAA).

TAA is a form of ‘fine-tuning’ to the strategic asset mix, often done in response to a broad market trend. Such deviation may be left in place for lengthy periods of time as economic or market conditions warrant.

Market timing, on the other hand, is akin to betting. Its success depends on profitably gauging the size and scope of random market spikes while avoiding the equally prevalent random market troughs.

It is clear market timing could add value, but the simple fact of the matter is the probability of success is slight. Tactical moves, however, can take advantage of price movements if conducted in the correct manner.

Posted on 16 Jan 2012