By Mary Holm, independent financial writer. Article reprinted from Holm Truths* with permission from Mary Holm. Many share investors try to time their purchases and sales. “Now is a good time to buy”, they’ll say. Or, “The market’s about to plunge. Get out while the going’s good.” Sometimes they’re right.
“Some (market timers) win big – but they lose big, too,” says American research analyst Ernie Ankrim. “Unfortunately, the public often only hears about the upside of a market timer’s performance… As money managers gain experience, they give up on timing.”
The fact is that nobody can accurately predict share market performance. Those who try, often regret it.
An example: If Joe invested in the US share market (actually, an S&P500 index fund) in the ten years ending May 2002, his return would have been 10% a year, according to Bloomberg.
But if he had been in and out of the market, and happened to miss just the five best-performing days – that’s only five out of more than 2500 trading days – his return would have dropped considerably, to 7.5% a year.
If he had missed the 10 best days, it would be less than 6%. If he had missed the 20 best days, it would be just 3%. And if he had missed the 30 best days – and we’re still talking just 30 out of 2500 – his return would be a pathetic 0.8% a year.
Nobody, of course, would be unlucky enough to miss all the good days. But those who are in and out of the market will almost certainly miss some booms. Days when the market soars are notoriously difficult to foresee.
A counter argument is that, if Joe is in and out of the market, he will also miss some of the particularly bad days. Over the long term, though, there are more good days than bad.
Other research shows that, if you’re investing for the long term, it’s not worth worrying too much about when you buy. Buying or selling on the worst day of the year doesn’t make nearly as much difference as most people would imagine.
Suzy invested $5000 a year in the New Zealand share market, over the last 30 years. The total money invested was $150,000. If she had extraordinarily bad luck, and each year she bought on the day when prices were at their highest, at the end of the 30 years she would have about $650,000 worth of shares.
If she had extraordinarily good luck, and always bought when prices were at their lowest, how much would she have at the end of the 30 years? When groups are asked this question, everyone guesses too high. The answer is around $850,000.
Given that we don’t know, at the time, when the market has hit a peak or trough, we’re best to simply buy or sell shares or share fund units when it suits us.
Bernard Baruch, a highly successful US investor said, “Don’t try to buy at the bottom and sell at the top. This can’t be done – except by liars”.
* Holm Truths is an independent quarterly newsletter distributed by companies to their employees, superannuation scheme members, clients and the like. Any views or information given in the article are not necessarily the views of AMP.