Should You Shift Your Money Around?

The reality is the market always moves in cycles. It is its nature. Data shows that being out of the market in times of uncertainty has been quite costly for investors. 

We wanted to share with you the facts and numbers.

According to studies, a lump sum invested in October of 1929 ( the worst possible period of the Great Crash) in a balanced portfolio with no other money added would have returned a compounded average of 8.02% per year. Yet Very few investors end up earning that return. The reason behind this underperformance is that we let our emotions get the best of us: we panic-sell or we think we can time the market properly. 

To be a good investor you should have no attachment to any short term movement of the markets at all. What you do not want to do is to pull out and sell on the low. You also don’t want to try to time when to move in and out. 
Andrew Hallam studied the top Tactical Asset Allocation funds trained analysts, whose job is to move buy/sell constantly to provide their funds with a sharp profit edge. These ‘experts’ keep their eyes on global interest rates, tax cuts, corporate earnings projections and market valuations…

• During the 5-year period ending June 13, 2018, the best ones averaged a compound annual return of  6.11% per year.
• A more diversified portfolio of indexes (40% U.S. bonds, 40% U.S. stocks, 20% international stocks) would have averaged a return of 7.75 %.

The result?  A diversified portfolio of low-cost index funds beats the top experts who tried to timed the market.

When you move your money, you try to do what these tactical professional investors do. No-one can properly time the market. By attempting to do so, you can easily miss out on the best performing days. Let’s look into a recent example: Between March 23 and 26, the market returned an average of 19%. If you were out of the market for these 3 days, you would have missed out on the rebound! Research shows that staying fully invested through the bear markets would lead to greater returns than moving investments into cash.

When we keep listening to the different financial news when volatility hits, we are tempted to mess with your sound investment strategy. 

Claims of successful market timing are mainly a result of a mix of luck and data snooping.

Sarwa analyzed the different periods over the last 30 years based on different actions scenarios to better understand the impact of trying to move in and out of the market. Dr. Jiro Kondo, our Head of Portfolio Construction and MIT phd in Financial Economy,  looked into the impact of pulling out of the market and sitting in cash, even for days. In this analysis, a dollar invested in 1990/01/01 would be worth 6.803 dollars today. 

What this tells us is that the simple strategy of just staying invested throughout (Scenario 1) beats the ‘timing the market’ strategies explored. In some cases, the difference in performance is substantial. For instance, with Scenario 3, the market timing strategy that exits when the market drops by 30% and re-enters following a run-up of 10%, you would earn 21.5% less. This major shortfall occurs despite only being out of the market for 33 days –  highlighting how exiting the market for even a short period of time can greatly harm investment performance.

We’ve looked at several other investment periods as well (e.g., post-1970, post-World War II, post-2000) and similar results arise. Our conclusion: at best, market timing does not work and is based on speculation and luck. 

If you sell during a downturn, you actually realize your losses. More generally, history suggests that being out of the market in times of high uncertainty, which follows market downturns, has been quite costly because it reduces an investor’s ability to benefit from market recoveries. These recoveries usually occur in quick bursts that are unpredictable and almost impossible to time.

Abandoning course can be costly. Keep calm and keep invested. You don’t want to miss out on recovery.