Time In The Market Or Timing The Market?
Solicitor-Advocate (In-House Company Solicitor)
This week we learned that the end is nigh, or at least the era of rock bottom interest rates and sub-2% inflation. The
As investment managers commence their get out of jail free rhetoric after losing so many clients so much money in the recent severe equity and bond market pull-backs, we consider their assertions that investors must stay close to fully invested at all times through fear of missing out on the best days, versus our philosophy that you need to be active, and that the most important thing is to avoid the biggest losses rather than stay fully invested come what may in case you miss out on a big day on the upside.
I have been telling the team for the past year, that decades ago, when I was at Close Brothers Merchant Bank, we were taught to peddle the line “It is the time in the market that is important because you never know when the best days will be and if you missed the top 20 days out of the last 10 years, – your performance would be badly affected – and that you cannot time the market”.
It may have had a semblance of truth and respectability back then in the late 1990’s, but it simply does not stack up today. It is frustrating for both clients of such firms who find themselves on the losing end of this totally out-dated and lazy philosophy, and for investment managers and advisers like ourselves who work so hard to do the right thing for our cherished clients, to hear this “after-the-event” nonsense.
Investment managers come out with this line every time they have lost clients a shed load of money due to them having stayed close to fully invested (which they always do bar a few minor, almost meaningless, reductions around the benchmark asset allocation) in times of severe market stress when common sense would tell anyone that you need to reduce risk assets.
They will tell you that you should not hold cash and that the stock markets offer a yield which is better than cash. So let us properly consider their rhetoric that you must stay invested at all times because the most important thing is “the time in the market”, and that the yield on the FTSE 100 – 3% per annum which is just about better than cash now, makes it senseless to ever hold cash as a short-term strategy.
Well, the 3% per annum yield on the FTSE works out at just 0.25% per month. We would say this is almost meaningless when the market falls by -6.5%+ as the FTSE 100 has over the past couple of months.
As for “Time in the Market” – well as I have said many times before, although the FTSE-100 did very well in past times when fundamental economics were free to reign (as opposed to these manipulated markets with massive QE (printing of money to add on to the already inconceivable amounts of government debts which will never be able to be repaid, – and now with Chancellors of the Exchequer and Prime Ministers unable to grasp basic economics) – since 1st January 2000 (almost 23 years ago!) the FTSE 100 has performed as follows:
1st January 2000 FTSE100 was at 6984
30th September 2022 FTSE 100 was at 6866
FTSE-100 Performance over the past 23 years is a loss of -1.69% if we assume thatthe varying yield just pays the investment fees and any other associated costs.
So all of these so called ‘investment managers’ who always copy and paste this much overused and outdated anecdote, – usually after they have just lost their clients a lot of money because their processes and skills-sets which are set in the past all the way back to “Modern Portfolio Theory” created by Harry Markowitz back in the 1950’s and which is still taught today to investment professionals, do not allow them to ‘time the market’ (i.e. identify trading ranges in volatile markets by being active to buy at lower levels and sell at higher levels, trot out this nonsense that the most important thing is the “Time in the market”.
Well, here you go, – if an investor had invested £500,000 in the FTSE-100 almost 23 years ago on 1st January 2000, – and assuming that the small amount of annual yield had covered the investment managers fees and associated costs, then the £500,000 invested in the FTSE-100 would now be worth just £491,550 – after almost 23 years!.
Now let us consider the real value of the £491,550 that is left after applying inflation into the equation. . Since January 2000 the pound has had an average inflation rate of 2.89% per annum producing a cumulative price increase of 87.09%. This means that prices are 1.87 times higher than average prices since 2000, according to the Office for National Statistics composite price index. A pound today only buys 53.476% of what it could buy on 1st January 2000.
Therefore, the £500,000 invested on 1st January 2000 into the FTSE 100 returns only £491,550 because the investment has achieved a -1.69% loss over 23 years. Since then, inflation means that the £491,550 that you have left, only buys the £262,861.27p today compared to what £500,000 could buy back when you made the £500,000 investment almost 23 years ago. So, effectively by maintaining the faith, and adhering to these investment managers who say the most important thing is the “Time In the Market” (i.e. stay invested at all times), – you would have invested your £500,000 almost 23 years ago and today the value of your £500,000 would be just £262,861.27p.
By following their philosophy, you would have remained invested for c.23 years and the outcome would be a loss of -47.42%.
Or, would they now argue that 23 years is not long enough to remain invested? When is long enough?
We, at Private Office Asset Management prefer stable markets where we can buy and hold, – but in these extraordinary times, it is simply not good enough. With the markets swinging wildly upwards and downwards, and with the negative news flow that is never-ending at the moment, this buy and hold philosophy borders on the criminal in our opinion. With this volatility comes opportunities.
Firstly, and most importantly – we must try to avoid the heavy losses that any reasonable person can see are coming, by taking the bold step to divest to a meaningful degree of those risk assets which are most sensitive to the current problems. We believe that the most important thing is not “Time in the Market, – we believe the most important thing is to avoid the heaviest losses. This is not rocket science, it is merely sensible hands-on active management & advice. When markets have fallen back a significant amount and they look cheap and good value (even in the most challenging of times, share prices and markets reach a reduced price where they look good value), then be bold enough to buy back in.
Can we sell at the top and buy at the bottom? No, of course we can’t, – that would be a ridiculous claim and we have never suggested that we can do that. But can we divest significantly when the markets are relatively high and the bad news flows is clearly going to adversely affect the prices, – yes, we certainly can and we have done so many times. Can we buy back in at lower levels? Yes of course we can. All the while these investment managers who advocate “stay close to fully invested and don’t worry about the big losses, because as long as you remain invested the markets and your capital will come back up” and they now have to stay fully invested because otherwise they crystallise their huge losses for you. Well, if we haven’t held these plummeting assets, then we are free to invest at the lower prices, with most of your capital still intact, and if these other “stay invested at all times” managers & advisers are correct, and the markets come back up – then we will come back up with them but with far more of your capital still intact and thus the gains will be significantly greater.
In markets such as these we want to reduce volatility (risk) within your portfolio as mush as possible, – and so we will then look to take profits and reduce our exposure once these risk assets start to look expensive or vulnerable for a fall if the prevailing conditions out there are not favourable. This applies equally to government bonds as it does equities. The reason we have not been hurt by the falling bond prices is because we sold them before the big sell off. Same with equities. Find out more about our portfolio management services here.
Do we just keep buying and selling? No – Last month, September 2022, we had our second lowest trading month ever because we were happy with our defensive positioning and this proved to be an excellent call as volatility was very low and we once again out-performed the Cautious, Balanced and Growth benchmarks significantly. But it would be foolish not to try and take advantage of volatile equity markets which have fallen so markedly again by not trying to profit for our clients by exercising our skill and judgement. If you want to find out more about our stockbroking services, visit our dedicated webpage.
As we continue to negotiate our way through this most challenging of years, we have built up some excellent core holdings across our risk-rated client portfolios which includes lower volatility alternative strategies which by and large are not directionally correlated to equities or bonds, and which can actually do well in falling markets. These are the current buy-and-hold securities which we favour – but at the moment we cannot rationally agree to buy and hold the traditional equities and bonds.
In conclusion we absolutely do not concur with the bizarre notion of the most important factor being “Time In the Market” to a successful outcome – quite the opposite in fact we believe is true in these changing times. Our performance and volatility bears this out.
Private Office Asset Management are delighted to announce that we are attending the following Business Expo’s:
- Brighton Business Expo – Thursday 6th October 2022 at Brighton Racecourse
Please visit the following site for details:
Brighton Business Expo | Oct 06, 2022 at Brighton Racecourse (b2bexpos.co.uk)
2. The Business Show – 16th & 17th November 2022 at the London Excel Centre
Please visit the following site for details:
Welcome – The Business Show 2022 (greatbritishbusinessshow.co.uk)
Both of these events are free to attend, with 30,000 expected across the 2 days at the Excel. Come and meet the team!
At both events we will have our Harley Davidson custom built chopper which was commissioned by the Hollywood blockbuster film “Mad Max : Fury Road”. It was in the film, and having been a secondary sponsor of the bike we took the opportunity to purchase it after filming ended.
We hope to see you there!
Please note that nothing written here by the author should be construed as giving advice, it merely outlines our thinking. Any advice will be discussed and proposed on an individual basis with each client when any advice that is given should be fully discussed with us before proceeding with any proposals made.
Yours sincerely,
