Market timing is futile

Academic studies have demonstrated that even for professional investors a strategy of trying to second guess market moves is unlikely to be successful.

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In April 2015 academics studying the performance of multi-asset funds managed by professionals concluded: “we find overall that asset class timing skills ….is rare, existing only among a tiny minority of funds.“ (source: Clare, O’Sullivan, Sherman and Thomas)

For the private investor timing decisions are most commonly linked to concern that markets are going to fall and thoughts that it might be beneficial to sell now, or defer an additional investment. Human brains cope badly with financial stress and start to fear the worst, even though it hardly ever happens.

Most people only start to worry about the direction of markets when there has been a flow of bad news. When we read about it in the press, prices will already have dropped because markets react instantly to known facts.  If you do decide to sell, or defer a purchase then it will only be profitable if you are prepared to buy when the news is even worse. Most people are not that brave. Consequently, they miss the market bounce and then become ‘anchored’ on the level at which they sold. Many only get round to buying when prices are much higher.

This behaviour has been measured in the USA for over 20 years in the Dalbar Quantitative Analysis of Investor Behaviour (QAIB). It shows that this behaviour has cost investors a large part of the returns they would have earned by just staying the market.

EQ tip: over the long run it’s not market timing that wins, it’s time in the market.