By Jordan Toy
With the COVID-19 pandemic dominating news, recent volatility on stocks globally and US markets trading at an all-time high, I thought an interesting way to kick off the new year would be to spend some time investigating the impact that attempting to time the market can have on your investment portfolio. To quote Terry Smith, the founder and chief executive of Fundsmith – a fund which has returned 440% to investors over a

“When it comes to so-called market timing there are only two sorts of people: those who can’t do it and those who know they can’t do it”.

There is frequent commentary in the financial media about the next big correction or upswing, often coming from leading names in the financial sector. This is more often the case when markets are trending strongly upwards or reaching new all-time highs (sound familiar?) than when markets are falling. And chances are if you dig deep enough you will eventually find numerous articles predicting the next big market correction.

Interestingly enough, many of these predictions fail to give any indication of when the market is expected to drop, and rightfully so as more often than not even the most educated of investors have no idea! Months and sometimes even years can go by before this ‘correction’ materialises and of course these commentators claim that they have been saying all along this was coming. Without being overly blunt, this brings to mind the old saying that ‘even a broken clock is right twice a day’.

I am of the view that patience over the long-term leads to superior investment results, even when this means riding out the storm of a recession (or several).

To illustrate this, I examined the closing prices of the S&P 500 index over the last thirty years* which includes the Dot-com bubble, the Great Recession of 2008 and the recent pandemic related market crash in early 2020. Had you invested in a low cost S&P 500 index tracker in mid-October 2007, close to the market peak prior to the 2008
recession, by October 2017 your investment would have increased by ±71% and by December 2020 it would have increased by ±150%. To take this even further, had you invested in the S&P 500 index on 10 March 2000, the market peak before the dot-com bubble, you would have earned a 170% return to date.

In these examples I have been overly conservative, assuming you invested your funds at precisely the wrong time (at a market high before a crash) and further assuming that you earned zero dividends for over thirty years. In reality, many S&P 500 companies pay dividends and when the compounding effect of reinvesting dividends is factored in, the returns mentioned above increase dramatically.

What the above returns show is that without trying to time the market, investing at ‘the wrong time’ and earning zero dividends, you would still have earned superior returns compared to many professional active managers who attempt to outperform the market.

I am not saying that the next market crash isn’t on its way, because it certainly is, but what I am saying is that when looking at the major market indices over a long time period, trying to time your investment to enhance your returns, becomes less and less relevant to the conversation.

*Closing price data sourced from Refinitiv Eikon – Thompson Reuters