Poor market timing can hold severe penalty

Timing market trends

Strategies aimed at maximising returns by timing the market can be extremely costly if executed poorly.

Investors who try to gain an advantage by timing equity market trends to their advantage can miss out on significant returns should their process prove to be incorrect, a domestic fund manager has said.

“Timing the market is very, very difficult and generally fruitless,” Aitken Investment Management chief investment officer Charlie Aitken said.

To illustrate his point he referred to statistics comparing the overall average compound annual growth rate generated by the MSCI World Index from 2004 to 2018 against the average compound annual growth rate had an attempt to time the market been made over this period.

“So over the last 15 years MSCI World Net Total Return Index has delivered a compound average growth rate of 7.1 per cent. However if you only missed the best five index days in those 15 years your return would have only 4.8 per cent,” Aitken said.

“If you missed the 10 biggest up days in 15 years in markets you return would have been only 3.1 per cent.

“If you were unlucky enough to miss the 20 biggest up days in 15 years you return would have been only 0.8 per cent, that is, less than inflation which is 1.7 per cent on the run.

“And if you missed the best 30 up days you actually would have lost money over 15 years.”

Aitken revealed he had experienced investors wanting to time the market, and exit, as recently as August 2019 during a performance dip but highlighted how big an error that strategy would have been.

“In November the markets were generally 7 or 8 per cent higher and you would have missed the annual return just by trying to time the market in August,” he explained.

“What we say to people is we don’t try to time markets. We try to use portfolio construction to give some diversity inside the portfolio, so we’re not invested all on one theme, but these statistics remind you that prudent investing is about owning the best stocks and staying invested.”

According to Aitken, maintaining this type of discipline is becoming increasingly challenging as more immediate information and speculation is being made available through social media which some people find difficult to ignore.


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