The Long Game: Understanding the Futility of Market Timing

Can you outsmart the stock market? It's a question that has intrigued investors for generations. At Timeline, we've delved into the data, scrutinising the performance of active managers and uncovering a stark reality—approximately 90% consistently fail to outperform market indices. This blog piece explores the reasons behind this underperformance, with a particular focus on the impact of market timing. The accompanying paper, available for download, presents a comprehensive study that reveals the futility of attempting to time the market.

The Temptation of Market Timing:

While it's tempting to attribute underperformance to poor security selection, the evidence suggests a more nuanced picture. Our analysis at Timeline indicates that market timing plays a significant role. Attempting to time the market is akin to predicting the British weather for a perfect picnic—it's unpredictable. This article dissects the drawbacks of market timing and advocates for a long-term investment horizon.

The Experiment:

To illustrate the impact of market timing, we conducted an experiment. We considered over a thousand 20-year rolling scenarios from January 1915 to December 2022, analyzing the effects of missing the stock market's best days on a global equity portfolio. The results are revealing, emphasizing the importance of patience and discipline in long-term investment strategies.

The Power of Staying Invested:

The accompanying chart illustrates the growth of a £100,000 investment over a 20-year period. Staying fully invested in the global stock market yielded an impressive £887,586 with an annualized return of 11.53%. In contrast, missing just the five best days resulted in a significantly reduced ending pot of £623,039, with returns dropping to 9.58% annually. Avoiding the market on 10, 20, or 30 most rewarding days led to progressively smaller fortunes, highlighting the key takeaway—every day counts, and the best days count a whole lot more.

The Skepticism and the Data:

Skeptics of the "stay invested" approach may wonder about the chances of missing all the best days. Our findings show a consistent pattern: investors tend to miss out on the market's best days when attempting to time their exits and entries. The distribution of the 50 best days in the S&P 500 since 1951 reveals that 52% occurred during bear markets, emphasizing the difficulty of successfully timing the market.

Tangible Examples and Market Volatility:

Tangible examples from recent history, such as the market surges during the COVID-19 pandemic, illustrate the market's volatility and the potential for substantial gains at unexpected times. The data consistently shows that the best days often occur within two weeks of the worst days, emphasizing the challenges of market timing.

Conclusion:

In conclusion, successfully navigating the investment landscape isn't about predicting short-term market movements; it's about setting a course and holding steady through the storms. At Timeline, we advocate for the power of sticking to a globally diversified investment plan and playing the long game. Market timing is like catching lightning in a bottle—difficult and with potentially shocking outcomes. The real story of market history is one of resilience and recovery. Bear markets come and go, leaving behind the seeds of flourishing bull markets. The key takeaway: it's time in the market, not timing the market, that builds wealth. Stick with it, stay disciplined, and let the market do what it does best—grow over time.