Should You Try To Time The Markets?

An excellent article was recently published by Nedbank illustrating the point that it is not wise to try and time getting into the stock market or equity unit trusts.

We quote verbatim:

We don’t know when the market will turn around or if it will fall even more from its current levels. We can say that long-term investors should not be fazed by the drop, and that they probably should not disinvest now. In fact, some of the best returns have been achieved by investing after a crash.

Even disinvesting from the market for very short periods of time can be detrimental to achieving good returns. The illustration below shows by how much your return can fall if you miss out on some of the best days of the market:

The orange bars show the returns that an investor would have achieved and is measured on the left vertical axis, while the green line shows by how much an investor’s overall return would fall, and is measured on the right vertical axis.

For the ten years to 31 December 2008, those who remained fully invested in the South African equity market would have achieved a return of 466%. If you missed the best 10 days, your return drops by more than half to 222%, and if you missed the best 30 days your return would have fallen to a meagre 42% over the entire 10-year period (which is less than 10% of the return that you would have got if you just remained invested in the market). It is amazing how quickly investors can diminish their achievable returns just by missing a few days in the market. This is why we do not recommend that anyone attempts to time the market in any way.

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