Tuesday 24 May 2011

Is it best to try and time markets?

Question
Some time ago I wrote asking whether you had any figures for what happens when an investor misses the worst N market days in (say) a five or ten year period. (I was curious to know how such figures would compare with those frequently given for missing the best N days.)

You were unable to find figures, but I am now in a position to tell you a little about what they might be.

According to the Morgan Stanley Countries Index (MSCI), an average investor holding global emerging markets funds for the whole of the ten years up to April received an annual return of 15%.

The average investor who missed the best 10 (or 20) days received 8.5% (or less than 5%).

The average investor who contrived to miss the worst 10 (or 20) days received 22% (or just under 28%).

Source: Ian Cowie, Daily Telegraph May 21.

You may not be sure what this proves. I’m not sure either. However, the figures relating to the best N days are often trotted out as somehow establishing that one should always, always be ‘in the market’. The above figures for the worst N days suggest that on the contrary the odds may not be stacked against one if one misses the odd day or several. Perhaps what the figures really show is their worthlessness, whether for best or worst days.

On that sad conclusion, I hope I haven't wasted your time.Answer
Thank you very much for the figures, they make interesting reading.

I suppose the rationale behind figures showing reduced returns if you missed the best N days is that it highlights the risk of missing big upturns (due to not being invested) when trying to time markets (i.e. attempting to buy at the bottom). But you're right, in trying to time markets you might also miss very bad days and end up better off than had you stayed invested.

On balance the odds might be in favour of remaining invested throughout because it's easier to stay put (and not miss the best N days) than to actively try and avoid the worst days.

Nevertheless, as you conclude, I wouldn't get too caught up on worrying whether you'll end up better or worse off by trying to time investments versus taking an invest and hold approach. Unless an investor is exceptionally insightful or lucky they'll probably get it wrong about as often as they get it right!

If anyone has more thoughts/views on this please post below.

Read this Q and A at http://www.candidmoney.com/questions/question481.aspx

No comments:

Post a Comment