14 Oct The costs of ‘What if’

When investment markets fall in value like they are now, we can think, “what if we could’ve avoided this somehow….” or “Why not get out of investments now (sell) and sit in cash until it’s the right time to get back in…”. This is known as market timing, having a crystal ball, and predicting the future.

In reality, it’s incredibly hard to do accurately regularly, regardless of what people say in hindsight.

What is not highlighted is how costly it can be when you try doing it.

Let’s look at the below data/research:

 Why/How?

Investors who panic and sell often sit in cash, waiting for the perfect time before reinvesting.

History/data shows investment markets recover and go higher well before an investor realises that now is the time to be invested again.

This is because investment prices are highly competitive; they have all the available public information built into the price and have 12 to 18-month future economic expectations also factored into their prices.

As new information comes to light daily, the 18-month outlook and expectations also change.

Should it be optimistic, investment markets start rising strongly in value (often very quickly) well before the optimistic outlook comes to fruition.

Investors then miss out on some of the best daily, weekly and monthly investment returns. These positive returns compound the portfolio even higher in the future (as shown in the first graph).

The missing out on compounding higher future values reflects the “market timing investor” achieving lower average returns over time.

The below study highlights that this is happening for the average investor.

Here the average share investor received a lower average return on investments than is available from the total broad share market (in this case, the US S&P 500 index), incorporating all of the rises and falls in investment market value:

Please note the statement “Average Equity (share) Fund Investor”. This is saying that, on average, investors who try and time the market get it wrong and miss out on returns more than they get it right.

It also means there are people/investors who do time it right… it’s just that most that do try, fail to get the timing right.

The next question is, of the ones that get it right, was it luck or skill?

Most research suggests it is more luck than skill.

Our job is to ensure that you follow an investment approach to achieving a meaningful investment return that is highly probable and not, on average, likely to lead to a negative outcome or achieve a positive effect that mainly relies on luck….

In Summary

As difficult as it can be, research shows that staying invested in investment markets (in good and bad times) gives us investors the best chance of long-term success. This then enhances achieving a meaningful investment return that helps us achieve what is important.

Please remember that all the above comments are general in nature and do not represent direct personal advice. Should you need further information or specific personal advice, please contact us.