Time in the Market or Market Timing?
2018 will be the worst year in a decade with FTSE 100 falling an approximately 12.5%. We now ask ourselves if it is the time you spend in the market that matters or if you can time the market to perform better?
By Viktor, co-founder of Bifrost - Dec 31 2018
After a year fueled by anxiety over trade wars, Brexit uncertainty, and fears over the global economy, it is now clear that the FTSE 100 suffered the biggest annual fall in a decade. The FTSE 100 shed more than £240 billion in 2018, from falling 7,687 at the start of this year to 6,728 at its close.
My point is that it is extremely difficult to time the market, which we learned not least in connection with the past year. The stock exchange trended downwards from January to the end of March and then recorded its highest listing on May 22nd. After May, the stock exchange sloped downward again and ended earlier today. In fact, if one had departed on a seven-month holiday without Wi-Fi and the opportunity to check on the portfolio had not seen any significant difference between March and October.
Fast movements in both directions are common and it is difficult to time them. Only this year we saw the stock market decline almost -10% from January to the end of March. Just under two months later, on May 22nd, we saw the stock market rise + 14.35%. Of course, this applies in both directions but over time we know that the stock market tends to rise. This is because the companies are growing, sales/profits are rising, and that the stock exchange occasionally tends to value the profits higher. What should not be forgotten is that the composition of the stock exchange, however, looks different. In the US, many of the largest companies in the 1980s were oil-related and today it is the tech that is the "new hot".
Market Timing or Time in the Market
This is something that is often debated among investors. Is it time in the market that, like the river, lifts stranded boats on the sand bed after ebb or should you jump from stone to stone and try to time the market?
The picture above from Business Insider shows how the return is affected if you miss some of the best days. During the 20-year period 1993-2013, it was enough to miss 10 days to almost halve the return. If we count on 250 trading days in one year, 10 days in two decades means 0.2% of the number of trading days, which makes half the difference, it is worth to think about.
I usually say that there are as many investment philosophies as investors and you should simply save and invest in the way that suits you best. One common objection is to ask how the above development had looked if you missed the 10 worst days. Of course, much better but, it requires a crystal ball to be able to know when the stock market's regular settlements come and when it is time to enter the market again and jump to the next stone, something which in any case I’m not able to do.
Happy returns and Happy New Year.