Scott Gallacher: The fool’s errand of market timing

Scott Gallacher

Market timing. Questions about it may sound like a broken record but they are one advisers continue to hear, particularly following the Brexit vote. Indeed, I have been contacted by a couple of clients wondering whether they should take the opportunity to “sell at the top”.

In common with many advisers, I revisited the old “time in the market versus timing the market” argument, acknowledging I cannot foretell whether it will rise, fall or move sideways. But then again, neither can any other adviser, fund manager or client.

I recall an Isa provider’s sales aid showing the benefit of remaining invested: it highlighted the huge return you missed out on if you missed the best days in the market. However, I have never really liked that message because it ignores the potential saving from missing the worst days in the market (and I suspect the best and worst days will be pretty close together). Even if you could get it right, I doubt many would be fast enough to get their withdrawals and reinvestments timed well enough to benefit fully.

In my experience, people are much more inclined to want to sell investments during or following a crash when things look at their bleakest, and most inclined to invest when we have seen a good run on the markets.

My view, and one I pass to clients, is that given no one can predict the markets, and that most clients only need to obtain market returns to achieve their goals, it is best to avoid adding the additional risk of market timing. This is especially true as the emotional cost of any loss is usually higher than the emotional gain of any profit.

I would expect my view is one shared by most advisers, so I was somewhat shocked to hear of one IFA who apparently advised all of his clients to switch 50 per cent into cash the morning after the Brexit vote.

Surely this is a ridiculous gamble, not only for his clients but also himself and his firm? If he gets this right, his clients will naturally be delighted – but what if he is wrong? I recall a large London stockbroker doing something similar about 20 years ago and unfortunately for them the market did not fall as predicted. Consequently, their clients became disheartened with their underperformance and ultimately left in their droves.

As an adviser, I do not think it is my job to try and predict the market. Instead, it is about explaining why market timing should be avoided and recommending long-term portfolios appropriate to each client’s attitudes, circumstances and timescales.

Scott Gallacher is director of Rowley Turton