It is that time of the market cycle again when market participants contemplate getting out and coming back in when the dust settles, wishfully at lower levels. Whilst it is no doubt a tempting prospect, we are not sure if we’ll be able to call the bottom in real time (not hindsight) nor if lower levels are actually around when the dust indeed settles. Therefore, we at Marcellus prefer the cliched approach of ‘time in the market over timing the market’ relying on the belief that our portfolio companies will come out of the crisis stronger combined with the benefit a long enough investment horizon. However, some might fancy their ability to time the market. In this blog, Nick Magguilli who recently published his first book Just Keep Buying: Proven ways to save money and build your wealth, is at his data-driven analytical best to show why even then it is futile to time the market.
“Of course, you know I’m not a fan of market timing (see Ch. 14 in Just Keep Buying), but let’s say you’re right. Let’s say this is the beginning of the next 50%+ decline in U.S. stocks and you decide to get out now, nearly half a year since the most recent high. So, you move to cash, you watch the market crash, and then wait for the dust to settle before getting back in.
How long does it take for “the dust to settle”? Let’s say half a year to be sure. So six months after the bottom, you buy back into the S&P 500 at a lower price than where you sold. You’re officially a legend, a rockstar, an investing maverick. Congratulations!
But before you finish your victory lap, let me let you in on a little secret—you may have won the battle, but you will likely lose the war. I can explain.”
To prove, Nick tests what he calls a ‘Resonable Market Timing’ strategy which involves selling out and moving into cash six months after the market top and buying back six months after the market bottom (as no one can time the exact top or bottom perfectly all the time). He shows that such a strategy for the S&P 500 would have underperformed the ‘Buy and Hold’ approach in most decades since 1950 except the noughties. The most recent decade especially sees Buy and Hold beat timing: “In this case the Reasonable Market Timing strategy gets humiliated by Buy & Hold because it has too many false positives. It exits the market expecting a big decline, but that big decline never occurs. As a result, it ends up re-investing at a higher average price.”
The noughties were an exception as it saw two big declines which naturally lends itself to a timing approach. “…big declines in the S&P 500 have been rare throughout history. Because of this, it is difficult to identify (and avoid) these declines beforehand. As a result, this strategy ends up exiting the market too often.”
“Of course, maybe this time is different. Maybe the Fed is the arbiter of the market. Maybe passive investing has gotten too big. Maybe human nature has permanently changed.
But, I beg to differ. Because I’m not here to win the battle, I’m here to win the war. So market timers, permabears, and whoever else that thinks this is the end, wave your flags high. Wave them high for all to see. You may be right now, but you’ll be wrong later.”
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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
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