Here is the problem with market timing. It does not work.
For example, did you figure out that it was time to get out of the stock market last month?
The July 2022 stock market rebound reminds us of this. Keppler Asset Management’s August 2022 review shows the point.
The review says: “Recent Developments & Outlook After their sharp drop in June, developed markets equities recovered strongly in July. The MSCI World Index (ND) advanced 8.0 % in local currencies, 7.9 % in US dollars and 10.7 % in euros. Year-to-date, the MSCI World Index has lost 11.7 %, 14.2 % and 4.3 % in local currencies, in US dollars and in euros, respectively. It now stands at LC 6,557, $ 8,371 and € 4,356 (December 1969 = 100). The euro finished July down 2.5 % at 1.0197 versus the US dollar. Compared with its end-of-2021 level of 1.1372, it lost 10.3 %. Twenty-two markets were up and only one market—Hong Kong, which was the only winner in June— declined in July.”
Emerging markets rebounded as well. The Keppler analysis says: “After having suffered their worst monthly decline in a year in June, all but one of the emerging markets we follow here eked out some gains last month.”
You can see the full August 2022 Ke4ppler Developed market Analysis at https://www.kamny.com/wp-content/uploads/DM_Update_2022-07-31.pdf
The emerging markets analysis is at https://www.kamny.com/wp-content/uploads/EM_Update_2022-07-31.pdf
Another problem with market timing is that very small, very specific periods of time in stock markets have very large influence on nominal returns. The chart below,, from a study that covered 88 years of stock market performance shows that all of the extra profit potential of US stocks over US Treasury Bills in the last 89 years was contained in just 44 months, 4% of the entire time. Are we smart enough to capture that 4% exactly?
The chart below enhances the fallacy of market timing. Harvard Business Review published Robert Jeffery’s “Folly of Market Timing” in 1984. That report showed how difficult it is to achieve above average performance using market timing. Jeffery compared the result of two hypothetical investors who had the ability to switch between stocks and cash at the beginning of each quarter. Over periods of 7 to 57 years, the probability of losing from market timing is double the chance of winning.
There is always something we do not know. No one can predict the market’s ups and downs over a long period. The risks of trying outweigh the rewards.
Essentially, investors who try to ”time” the market sell off large chunks of stocks and switch into Treasury Bills, or other safe havens, when they believe stocks have peaked and are heading down. But they must also know when to start buying stocks again and get out of cash instruments when stocks begin to head upward – and that often is the hardest turn to call! In contrast, most money managers are almost always fully invested in stocks or bonds and tend to ride out the market cycles.
Keppler has expanded the Jeffery calculations on up to 2015. This chart shows that even if an investor is right 59% of the time, the return has the same as the average index.
Investing in the index would have been far less stressful and offered a greater chance of profit, even before transaction cost. Plus the tax and transaction costs would have been an additional major factor that reduced profit.
The lesson is that market timing is hard, stressful, ineffective and increases the chances of loss.
Gary
