The Futility of ‘Market Timing’

As we approach the end of a week where markets have produced a rather extraordinary rally in the wake of President-Elect Biden, along with news that we may have a successful coronavirus vaccine rolled out around the globe very soon, it occurs to me that now, more than ever, we need a gentle reminder about the futility of ‘market timing’.

First though, allow me to introduce you to something called Recency Bias. According to Wikipedia, Recency Bias is a ‘cognitive bias that favours recent events over historic ones. A memory bias, recency bias gives “greater importance to the most recent event”, such as the final lawyer’s closing argument a jury hears before being dismissed to deliberate.’ This is relevant because 2020 has been an extreme anomaly in the context of history; compounded by a media determined to make every day a bad news day and the smartphone age, where every piece of available information can be accessed instantly by the swipe of a finger. It is all too easy to get caught up in the here and now, but as long-term investors, we must always keep a wider view and maintain perspective.

‘He who predicts the future lies, even if he is telling the truth.’ – Arabian proverb

On to ‘market timing’ then. Just as an unfathomable number of people sold out of their portfolios during the unprecedented market decline back in March, thus throwing their well-thought-out, tailored, goal-focused financial plans into the furnace (and with it the long-term financial success of them and their families), many will now be feeling nervous that the market is now ‘too high’ and wondering if it is time to cut and run before the next big decline. On the flip side of this coin are those who like to ‘wait and see’ before investing their hard earned cash. In March, they were ‘waiting’ for markets to recover. In November, they are still ‘waiting’, but this time to see if there’s going to be another decline. How would anyone ever expect to cross the road if they live in constant fear of being hit by a truck? Uncertainty in this world will never go away, so why waste time focusing on things over which we have no control?

As ever, it is impossible to say where the markets will go next in the short-term. While it’s tough to foresee another decline as extreme as March 2020, there is, of course, the possibility that markets will correct themselves again in the near future. Then again, who’s to say the value of the Great Companies of the World won’t continue to surge upwards for some time to come? Who are we to even attempt to make predictions about this? There is no crystal ball for these things, and I’m yet to hear of anyone who can consistently make accurate predictions about the future.

‘Forecasters exist to make fortune tellers look good.’ – Warren Buffett

What we do know, however, (and which will always be our guiding principle) is that in the long run, markets reward the patient owners of the most successful companies on the planet. Going back to 1930, Bank of America found that if an investor missed the S&P 500’s 10 best trading days in each decade, the total returns would be just 91%. The total return over that period for investors who held steady through the downturns? 14,962%. My brain hurts just thinking about that!

As a long-term investor, your outlook should be focused on where you think markets will be in 5, 10, 15, even 30 years from now – not in 5 weeks’ or 5 months’ time. If a study exists that proves ‘market timing’ can be done successfully on a consistent basis over the long-term, I’ve certainly never seen it (because it doesn’t exist).

The key is to always remain patient and allow your investments to work their long-term magic. It certainly isn’t easy, but patience and optimism are the two key ingredients for long-term investment success.

I’ll leave you with this from Benjamin Graham ‘In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility.’

P.S. This is not advice based on your own personal situation, obvs.