Is investment success about time in the market or timing the market?
There are, generally speaking, two types of investors in this world – speculators who attempt to time the market and buy-and-hold investors who bank on time in the market.
Throughout history, a handful of talented (or lucky) speculators made big bets that paid off handsomely. The relative returns that these speculative investments realised made it an appealing approach.
However, speculative investments that deliver exponential returns are anomalies – outliers in what is generally a high-risk approach that most investors get horribly wrong.
We spoke to members of Investec's Global Investment Strategy Group to ask their opinion.
Time in the market vs timing the market
“If everyone could consistently time the market by buying at the bottom and selling at the top, we would all be rich beyond the dreams of avarice,” states Prof Brian Kantor, Chief Strategist and Economist at Investec Wealth & Investment SA.
Ryan Friedman, Multi-Manager Investments Head at Investec Wealth & Investment, agrees that the speculative approach is, at best, a hit-and-miss affair.
“To precisely time the entry and exit points in a particular cycle is almost impossible.”
Fight or flight
Investors tend to make terrible mistakes that erode investment value when left to their own devices. This trend is symptomatic of our primal fight-or-flight response, explains John Wyn-Evans, Head of Investment Strategy for Investec Wealth & Investment UK.
“The problem is that humans have behavioural traits and inherent biases that haven't evolved in step with financial markets over the last few centuries. We're basically making decisions with brains that are hard-wired for survival in the caveman era.”
The result is a herd mentality when markets are good and panicked selling when markets dive. “Without suitable advice, investors are more inclined to buy when the market is rising or near the top, and sell at or near the bottom as they react to market momentum,” continues Kantor.
With a lack of sufficient objectivity, it's important as an individual investor to leverage the collective wisdom and collegiate approach offered by established investment teams who are less prone to these behavioural flaws than individual investors, adds Wyn-Evans.
So what exactly does this collective wisdom suggest? “Time in the market, rather than attempting to time the market is the take-home message,” says Kantor.
“Everyone tries to time the market, but investors must understand that they can only beat the market by disagreeing with it, and the market is well informed. That's why time in the market is a better approach.”
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Why you can’t ignore timing
There are, however, a few nuances to this buy-and-hold investment approach. For instance, Wyn-Evans says your investment horizon matters. “The longer your horizon, the more relaxed investors can be.”
In this regard, historical UK stock market trends that extend back to the 1890s indicate that equity investors who remain invested for a 22-year period always make a positive real return.
However, Annelise Peers, Chief Investment Officer, Investec Wealth & Investment, Switzerland, believes that long-term investors shouldn't discount the value of timing. “Consider that, if you buy an index or an investment a week before it crashes 40%, it will take a long time to make your money back before realising a real return.”
Friedman affirms the importance for buy-and-hold investors to time their market entry. “The majority of gains are made in the first part of a bull market and again right at the end. While investors who ride out market cycles will realise a return, those who time their market entry more carefully will realise greater value.”
Phil Shaw, Chief Economist, Investec UK, believes that time in the market also offers additional benefits. “When investors gain experience they're better able to spot some of the turning points that may boost investment returns.”
Peers believes this is a particularly pertinent consideration for investors who take a phased approach to contributions, rather than making lump-sum payments.
Friedman adds that formulating a comprehensive understanding of the prevailing macroeconomic climate will also help investors identify market tailwinds and pre-empt market shifts to better allocate investments across styles and asset classes.
“In this regard, particularly for multi-asset portfolio managers, time in the market is very important, but timing your entry point into riskier assets is also a key consideration.”
John Haynes on why a long-term view pays off
Leaving the party early
Wyn-Evans explains that it’s important to examine what the probabilities of the returns are at various times in the cycle and exit before the peak.
“So we leave the party early when everyone else is still dancing and get to the door before the fighting starts. By the same token, when it comes to getting back into the market, we’ll be arriving at the next party while they are still setting up the tables. The only way you can do it realistically, is to scale in around the peaks and troughs without trying to actually pick the moment.
The power of internal compounding
Ultimately, when investors adopt a time-in-the-market mentality towards asset ownership, they'll reap the rewards of the internal compounding that a company or investment generates, says John Haynes, Head of Research and Chairman of the Global Investment Strategy Group, Investec Wealth & Investment.
“Many fund managers we talk to say their biggest mistake is selling their winners, which equates to timing the market. They get uncomfortable with the size of their positions and trim them, which negates the internal compounding effect. Investors make the same mistake when attempting to adjust their exposures to time markets because they think they know more than the collective market intelligence. Investors have no chance with this approach. Rather spend time in the market by holding onto your good investments,” he concludes.