Category: Investments

Author: Tim Courtney

Why Investors Shouldn’t Time the Market

Date: 08/26/19

Between the trade war, recent selloffs and several earnings disappointments, there has been an undeniable bout of market volatility lately. In the face of this instability, it is only natural for investors to want to exit their positions. However, while this strategy is tempting, there is reason to believe it’s better for investors to weather the storm.


At Exencial, we conducted a market timing study dating back to March 2009 proving this to be true and recently updated our findings through June 30, 2019.


While the market has largely been in a state of expansion since the start of our study, we experienced several declines worth examining. Based on our findings, there were 25 instances where the market declined more than 4 percent, averaging about two and a half declines per year, which is relatively quiet compared to historical data.1 We have also experienced six drops greater than 10 percent, averaging about one every year and a half which is in line with what history shows.


In our study, we analyzed these drops to discern whether investors would be better off exiting the market during notable downturns or holding onto their positions. In so doing, we constructed a hypothetical strategy that looked very attractive on paper, but ultimately, was not realistic or feasible.


The strategy goes like this: Whenever the market declines, we would exit in time to only experience half of the drop. For example, in a decline of 4 percent, we would exit in time to only lose 2 percent. We wouldn’t have to time the market perfectly, but early enough to preserve half of our gains. From that bottom, re-entry also wouldn’t have to be perfect, but we would have to reinvest within 10 trading days of the trough.2


If this strategy was employed, investors would have seen a return of 114 percent since March of 2009. While this sounds attractive, it pales in comparison to the return of 211 percent that would have resulted from investing in the S&P 500 during the same time period. Additionally, the 114 percent return does not factor in trading costs and taxes, meaning performance would have been even worse.


In our findings, the hold strategy beat the timing strategy in 20 out of the 25 declines, meaning the timing strategy prevailed only five times. Even during those five times, however, we still believe investors would have been better off staying in the market as the precision required to execute this strategy perfectly is not humanly achievable. Additionally, while timing strategies provide lower risk, they ultimately yield lower returns.


Although it is certainly tempting to get swayed by headlines, it’s important that we as investors look beyond the noise. That said, we should always be monitoring our portfolios to ensure they are accurately representing our long-term goals and objectives and reallocate accordingly. In times of volatility especially, in lieu of timing, we advise investors to consider paring back some of their equities into cash or bonds. Overall, we believe this is a much wiser and well-founded tactic than trying to time to markets.


Should you have any questions about revisiting your portfolio allocations, please reach out to your Exencial advisor.


Sources:
1. Yahoo! Finance – S&P 500
2. Investopedia – Trough


PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.




About the author

4054781971

tcourtney@exencialwealth.com

Oklahoma City, Ok

Chief Investment Officer

Tim Courtney serves as Chief Investment Officer of Exencial Wealth Advisors and chairs the investment committee. He attained the Certified Investment Management Analyst (CIMA) designation in 2005 a... CLICK HERE TO READ MORE