As the year progresses, many investors will come across homespun financial market mottos such as ‘sell in May and go away’, based on the dubious idea that during the summer months you are better to steer clear of equity markets and hold cash. Underlying these familiar questions and old adages lies the idea of ‘market timing’ – an approach to investing that attempts to catch the moments when asset prices change direction.
On paper this may sound like a common-sense investment approach. But focusing on market-timing is a hugely controversial investment strategy. And its harshest critics would say it’s not really a strategy at all – just an enormous gamble.
Charlie Munger, vice chairman of Berkshire Hathaway and Warren Buffett’s indispensable partner, passed away last November just shy of his 100th birthday but his many insights and barbed comments will be remembered for years to come. One of these is particularly pertinent to the issue of market timing: “The world is full of foolish gamblers, and they will not do as well as the patient investors.”1
Market-timers use a range of techniques to achieve their objectives. They may look for trigger signals – buying or selling when certain figures, such as economic statistics, hit certain levels. Or they may look at market trends, buying or selling when prices rise or fall to a level outside a historic range. But while turning points in markets look obvious with hindsight, spotting those moments in real time is far harder – some would say impossible.
Share prices move constantly and each movement is the result of individual trades. Traders may be reacting to a specific piece of news, their own dynamic objectives, or worse, their own fears or dreams.
For market timing to work, a trader needs to be able to distinguish between noise and genuine signals. They also need to be able to do it consistently, because even if they can get it right some of the time, on the occasions they get it wrong they will be missing gains and perhaps incurring losses.
Historically, long-term investment strategies have delivered strong returns above inflation. Between 1996 and 2022, the S&P 500 delivered returns averaging 6.8% per year in real terms.2 During that time, there were periods in which the market fell, many of them entirely unpredicted – including the Global Financial Crisis of 2007-8.
Spending those 25 years in the market would have provided inflation-beating returns. To beat those returns by trying to time the market would have meant timing those short-term ups and downs accurately most of the time.
The world’s most highly regarded investors typically take a dim view of market timing. Warren Buffett once said that he was “no good at forecasting the near-term movements of stock prices,” adding: “I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.3”
Timing trades is still part of active long-term investing, but it does not try to capture gains from short-term market signals. Ignoring those market signals that are not meaningful is itself an active decision: rational active investment involves rigorous processes driven by analysis rather than by emotionally driven timing decisions.
This uncertainty goes to the core of the market-timing debate. Choosing a precise moment to invest in equities or other risk assets can be fraught, and short-term indicators such as sector-specific data and company results – above or below expectations – can cause significant short-term price movements.
Fixed income assets, or bonds issued by corporates or governments, are widely seen as reliable long-term investments. Capital is relatively secure and in the case of government bonds (US Treasuries or UK gilts, for example) it is as safe as it is possible to be. The income stream is also predictable.
However, the value of bonds can fluctuate in the short term in response to central bank interest rate changes – or changing market expectations about future rates. Government bond prices also fluctuate in response to predictions for government borrowing – the larger the requirement for borrowing, the higher the yields investors will require.
Private assets are often cited as an example of an asset type for which time spent invested is a crucial component. Private equity, private debt and direct investment in real estate or infrastructure all involve a longer-term commitment.
Indeed, in the short-term, private assets are often expected to show poor or negative returns, with the expectation for outperformance only over a longer period. Institutional investors have been increasing allocations to private assets in recent years, partly to secure long-term returns but also to diversify away from volatile equity and bond markets.
Identifying so-called ‘megatrends’ in the economy and business is one method that professional investors use to try to cut through short-term noise. The decarbonisation of the global economy, benefiting renewable energy and other industries, and the growth in artificial intelligence (AI) are two examples of megatrends that have often been identified by commentators.6
For example, institutions are split over whether a recession is inevitable in the near future, with 51% saying yes and 49% saying no. But even those who expect a recession are divided about its timing: 39% expect recession in the first half of 2024, 42% expect it to come in the second half, and the rest expect it to hit in 2025.
A similar variety of opinion exists over whether financial markets will become more stable in 2024, with 59% expecting higher levels of volatility for equity markets and 39% expecting the same for bonds.
Indeed, according to our aggregation of the public outlooks of many of the world’s global financial institutions (GFIs), caution is the watchword, owing to uncertainty over ‘exceptional circumstances’ – an unprecedented rate-rising cycle, a tense geopolitical backdrop and the covid debt backlog, among others.8
Many GFIs have not tried to make short-term predictions, having been burned with their calls in 2023 – the global recession that never happened, premature assertions that ‘bonds are back’, and so on. Instead, they’ve chosen instead to favour a longer-term view with a thematic investment approach – which includes factoring in the energy transition, as well as AI – and middle-of-the-road economic forecasts.
This clear division of opinion about the most basic questions about markets shows just how difficult it is to time a market. What is more, always attempting to time the market risks sitting on the sidelines holding cash, which provides little or no return, for substantial periods of time. This is why investing actively, looking for value in fundamentals, and spending time in the market has a far better record of delivering real returns.
Ultimately, successful investing is – and always has been – a long-term endeavour. To echo the wily Charlie Munger, time in the market is far more important – and fruitful – than trying to time the market. And reminding oneself of that fact is key to building a portfolio that can withstand not just the down times, but the triumphant upswings too.
- Bull/bear market – Stock prices are rising in a bull market; whereas they are falling in a bear market.
- Fixed income – An asset class that pays out a set level of cash flows to investors, typically in the form of fixed coupon, until the investment’s maturity date. The maturity is the pre-agreed date on which the investment ends, typically triggering the bond’s repayment (or renewal). At maturity, investors are repaid the principal they invested (in addition to the interest they have received during its term). The main types of fixed income investment are government (sovereign) bonds and corporate bonds, with green bonds increasingly being issued in recent years. Fixed income securities carry (to a varying extent) a degree of the following risks: credit, interest rate (as bond yields rise, prices fall), inflation and liquidity.
- Gilts – Bonds issued by the UK Government.
- Monetary Policy Committee (MPC) – A nine-member committee of economists and senior Bank of England staff that sets the UK’s central bank interest rate. The MPC is tasked with using monetary policy to achieve the Government’s inflation target of 2%.
- Noise – Market movements or data that do not provide a meaningful signal for a change in the direction of prices.
- Private assets – Assets that are owned and traded privately between investors that are not traded on a stock exchange or other public market. They include assets such as private equity stakes in companies and private credit, where investors lend directly to a business.
- Recession – A period when Gross Domestic Product (GDP) – A measure of the size of a country’s economy – shrinks for two consecutive quarters. Common symptoms of a recession are higher unemployment, lower company profits, falling stock prices and increased company insolvencies.
- S&P 500 – A widely recognised index that is used as a proxy for US large-cap stock market performance. It comprises 500 common stocks chosen for their market size, liquidity, and industry group representation, among other factors.
- Treasuries – A bond issued by the US Government.
2 Source: S&P 500 annual returns over the past 25 years (mckinsey.com)
3 Source: Warren Buffett On The Stock Market: What's in the future for investors – another roaring bull market or more upset stomach? Amazingly, the answer may come down to three simple factors. Here, the world's most celebrated investor talks about what really makes the market tick – and whether that ticking should make you nervous. December 10, 2001 (cnn.com)
4 Source: Andrew Bailey warns ‘still some way to go’ as BoE holds rates at 5.25% (ft.com)
5 Source: Interest rates may rise again next year, Bank of England warns (inews.co.uk)
6 Source: The 10 Most Important AI Trends For 2024 Everyone Must Be Ready For Now (forbes.com)
7 Source: 2024 Natixis Institutional Outlook Survey
8 Source: The year of dis-consensus
This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article. Any investment that has the possibility for profits also has the possibility of losses, including the loss of principal.