WHY YOU SHOULDN'T TRY TO TIME THE MARKET

Investment & Wealth Advice




Market timing is tempting but patience is the key to investment success

Ollie Barnett, Associate Director

This year’s coronavirus-related market crash has been followed by one of the sharpest rallies in history. It’s at times of extreme volatility such as these, that an investor’s mind can turn to market timing, and a series of “if onlys”.

“If only I'd taken my money out at the end of February, when the market peaked, and then put it back in at the end of March, when they hit rock bottom, I’d have made a fortune.”

You may even have convinced yourself, with hindsight, that this would have been an easy thing to do. After all, it was clear that coronavirus was becoming a problem well before the end of February.

As for the rally, the lockdowns – which could be viewed as the point at which developed world governments finally started to get a grip on the problem –were largely in place by the end of March, and central banks were flooding the markets with money. Surely that was a logical point for the rally to start?

Everything is easy in retrospect. But market timing is a lot harder than it looks, as one of the most respected economists of the 20th century learned to his cost.

How Keynes learned the folly of market timing

John Maynard Keynes (1883 - 1946), author of The General Theory of Employment, Interest and Money was not only one of the most influential economics and political thinkers of all time. He was a highly successful investor too.

Keynes took over as bursar of King’s College, Cambridge in 1921, managing the college’s investment fund which was worth £285,000 at the time, excluding property. According to a 2015 study by David Chambers, Elroy Dimson, and Justin Foo of Cambridge Judge Business School, published in by the time he died in 1946, he had grown the fund to £1.2m, far outperforming the market.

Incidentally, he also had a great eye for art. A more recent study by Chambers, Dimson and Christophe Spaenjers of HEC Paris suggests that his art collection of 135 pieces, which cost him just under £13,000 to accumulate, was worth roughly £76m. (It would have been worth just £500,000 if it had merely kept up with inflation).

The market is not rational

However, even Keynes – unquestionably one of the greatest intellects of his era – had to endure a few nasty learning experiences at the hands of the markets before he finally settled on a winning investment strategy.

Keynes recognised that markets were not rational. He famously described markets as a beauty contest where the goal was to judge, not which contestant the individual found most attractive, but whose face appealed most to the majority of participants.

In other words, he believed that a smart person could second-guess the mood swings of the crowd, and thus profit from them. Few people were smarter than Keynes, and he knew it, so this is what he set out to do, attempting to time the market based on his superior knowledge and skills. 

Keynes learnt the hard way

Keynes didn’t do at all badly with his initial speculations. It helped, of course, that he was moving in government circles and thus benefited from a constant stream of insider information (not illegal at the time). 

However, he also suffered from some brutal losses, which must have been made particularly stressful due to the fact that he was managing money for several of his friends in the Bloomsbury set. The 1929 stock market crash was arguably the last straw. 

In a later memo to the King’s College estates committee, he explained in effect that market timing was impractical, involved too much trading (and the associated costs), and was also psychologically fraught. 

The birth of "Value Investing"

Instead, he became what we’d now describe as a “value” investor. He found companies and assets that he believed were undervalued by the market, and sat on them patiently. It’s not dissimilar to what famous US investor Warren Buffett did during the early days of his Berkshire Hathaway investment vehicle.

And it paid off. According to the aforementioned Chambers, Dimson and Foo study, Keynes only began to beat the market after 1932, when he’d had his change of heart and abandoned market timing as a strategy. 

The key is to be patient

Most of us are of course, neither Keynes nor Buffett. But we don’t have to be, to invest successfully. We all have different financial goals and different ways to get there – some of us might choose to invest with carefully selected active managers, others through index funds, or a mixture of both.

However you go about it, the key is to view investing as a long-term process in which the spoils go to the patient investor, rather than the frenetic speculator. Investing regularly, into a sensibly diversified portfolio, while keeping your costs under control, will maximise your chances of meeting your long-term goals.

Is it time for an independent investment review?

At Weatherbys Private bank, we offer investment advice.  When clients come to us looking to invest, we will occasionally recommend an active investment manager.  What we will always do is recommend to our client that they choose the solution which will keep costs down.  

For this reason, many clients find that a portfolio of tracker funds is the right option.  We help them create the right balance of tracker funds in their portfolio and then ensure that it doesn’t drift over time. And, true to the low cost philosophy, we don’t charge a penny for this service.

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Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

Tax laws are subject to change and taxation will vary depending on individual circumstances.

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