Timing the market versus time in the market—debunking the myth. By Dale Gillham
Accepting the mantra that time in the market is more important than timing the market is probably the single greatest downfall of any investor wanting to beat the market average.
The public is often cautioned through advertising slogans about the perils of market timing, but time in the market is probably the most perpetuated myth in the financial planning and managed fund industry.
The reason why we hear the words ‘buy and hold’ or ‘it is time in the share market that yields returns’ is because the industry cannot time the market; the funds are simply too large to manoeuvre with any speed.
A common misconception presented by some in the financial industry to get you to believe that time in the market is more important than timing the market is that ‘market timers’ sell when the market is low and are out of the market when the inevitable rally occurs.
They assert that you run the risk of being out of the market at the trough of a decline, when sentiment is at its most negative and potential returns are at their greatest. They attempt to substantiate this argument by suggesting that if you are out of the market on the 20 biggest days that the market is rising over a 10-year period, your return will fall substantially.
However, the inverse of that argument is that if you are out of the market on the 20 biggest days that the market is falling, it stands to reason that your returns would surpass the market average over any 10-year period.
After all, markets don’t crash up, they crash down.
There are also significant advantages in investing directly, compared to being in a managed fund.
Research has shown managed funds cannot time the market. Instead they ride out the inevitable peaks and troughs in the market in the hope that the compounding effect will increase over the longer term. Meanwhile, your portfolio erodes and you continue to pay annual fees to achieve, at best, average returns.
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One research paper released by Inalytics online investment analysts indicates that most fund managers fall into the same trap as individual investors when it comes to shares by selling winning investments and holding on to under-performers. It seems that the majority of fund managers are optimists, spending more time buying stocks rather than managing their positions to sell at the right time, which explains why the majority of fund managers fail to outperform the index.
It is common for investors to sell winning stocks because they fear taking additional risks with stocks in which they have already made money, which also appears to ring true for fund managers. Unless fund managers learn how to time the market by selling losers and hanging onto winners, they will continually under perform the index.
For those in the know, timing the market is everything. It is about buying low and selling high, which is where the small investor has a huge advantage over fund managers.
Unlike fund mangers, who must invest your capital when they receive it irrespective of whether the market is rising or falling, you have the flexibility to diversify the timing of your entry to ensure you only invest when the market is rising.
The flexibility to move smaller amounts of equity between stocks and to only be in the share market when it is rising will result in creating a portfolio that outperforms managed funds by a significant margin.
It will require you to be a little more proactive than a ‘buy and hold’ strategy but the outcome is well worth it.
* Dale Gillham is the chief analyst of Wealth Within, a share market educator and private investments company helping individuals maximise their investment returns in the share market.
* The opinions expressed in this article are those of the author, and don’t necessarily reflect the opinions of DYNAMICBUSINESS.com or the publishers.
