Although simple in concept, in practice market timing is not so easy. As an old saying goes, no-one rings a bell at the top and the bottom [of markets].

While some investors achieve success with market timing on occasion, it's important to remember that these successes are sometimes outweighed by failures. 

Here are a few examples, both positive and negative, to illustrate the challenges of market timing.
 

Positive example:

Tech bubble (late 1990s): During the late 1990s, the technology sector experienced a significant bubble, with the stocks of many internet and tech companies soaring. Some investors recognised the bubble and successfully timed the market by selling their tech stocks before the crash in 2000-2002, avoiding substantial losses.
 

Negative examples:

Tech bubble (late 1990s): While some investors successfully timed the market during the tech bubble, many others did not. They continued to buy tech stocks at inflated prices, hoping for even more gains. When the bubble burst, many of these investors suffered substantial losses.

Global Financial crisis (2007-2008): Many investors failed to time the market during the GFC. After initially holding onto investments as stock markets plummeted, some investors subsequently panicked and sold off near the bottom, missing the subsequent rebound.

COVID-19 pandemic (2020): The rapid onset of the COVID-19 pandemic led to a sharp market downturn in early 2020. As in the global financial crisis, some investors sold their investments fearing further declines, only to miss out on the strong recovery that followed as central banks implemented stimulus measures and vaccine development progressed.

These examples highlight the difficulty of consistently timing the market. Even when investors make successful short-term predictions, they often involve a level of risk and uncertainty that can result in substantial losses or foregone gains if things don't go as planned.
 

What is the lesson?

The key lesson is that it is almost impossible to consistently time the market over the long term. 

Compounding the challenge is the fact that the biggest market rallies often happen in the middle of major market falls.

Earlier this year, Betashares crunched the numbers on returns from the Australian sharemarket over the 30 years to 31 January 2023, and the impact of missing out on the top 5 or top 20 days during that period.

The lesson is clear - by trying to time your sales to avoid the downturns, you run a risk of missing out on the big rallies, which ultimately reduces your gains over the long term, as the chart and table below shows.

Source: Bloomberg, Betashares. As at 31 January 2023. Past performance is not an indicator of future performance. Top five and top 20 days over the last 30 years have been removed from the respective data sets. None of these days occurred in the year to 31 January 2023 so one-year returns are unaffected.

In contrast to the market timing approach, many financial experts advocate a long-term, buy-and-hold investment strategy that focuses on asset allocation, diversification, and staying invested through market fluctuations.

[Editor’s Note: Do not read the following analysis as a recommendation to invest in ETFs or use them in buy-and-hold investment strategies. ETFs that seek to replicate the return of an underlying index can deliver negative returns in falling markets].

Investment funds, such as Exchange Traded Funds (ETFs), are a consideration for a long-term, buy-and-hold investment approach, in Betashares’ opinion. ETFs provide a convenient, cost-effective way to get exposure to all the major asset classes, including Australian and global equities, fixed income, cash and commodities.

You can use ETFs to build the core of your portfolio – investments that will provide your portfolio foundation over the long term, through the market’s up and down cycles. 
 

So, should I ever try to time the market?

By now it should be clear how difficult it is to time the market – and the risks you run if you get it wrong. However, that’s not to say that you should ignore market valuations, and adopt a “100% invested, 100% of the time” approach.

Just as some fund managers take an “overweight” or “underweight” approach according to their market view, you can also adjust your exposure. 

Rather than selling everything when you think the market may be overvalued, you may consider banking some profits by selling a portion of an investment. 

Similarly, when the market has suffered a significant pullback, if you think that a recovery is likely you can top up holdings, or take the opportunity to add a new investment to your portfolio.

This is very different from an “all in or all out” approach. If you get the timing right, you can potentially enhance portfolio returns – and if you don’t, at least taking an incremental approach means there is less risk of a catastrophic impact on your portfolio.

Of course, the approach you take should ultimately be informed by your personal objectives, financial situation and needs, and you should consider obtaining financial advice before making any investment decision and be aware of your own personal limitations, or biases. We explore these in depth here. 

DISCLAIMER

Betashares Capital Limited (ABN 78 139 566 868, AFSL 341181) (“Betashares”) is the issuer of Betashares Funds. Before making any decision to invest, investors should read the relevant Product Disclosure Statement and Target Market Determination, available at www.betashares.com.au, and consider if the product is appropriate for them. Investing involves risk. This article contains general information only and does not take into account any person’s objectives, financial situation or needs. It is provided for information purposes only and is not a recommendation to make any investment decision or adopt any investment strategy.