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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 

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Sigh… Couldn’t agree with this article more. Can’t believe there was an adviser or advisers that recommended switching out of the markets just before or after the Brexit vote. Some people will never learn. How in the world will any adviser be able to justify the massive lack of participation in the recent market rally unless this is used as a reason to reinvest at exactly the wrong time. We financial advisers should stick to what we are good at and stop trying to predict random events with illusory superiority. Dunning Kruger..

  2. Too many advisors point out that if an investor was out of the market and missed just the ten best days during the past 10 years then their annual return during that time would have gone from over 9% to less than 6% (nearly 4% worse), but they will neglect to mention that missing just the ten worst days during that time would have improved that 9% annual return to nearly 14% (nearly 5% better). Similar patterns exist for the best and worst months making it clear that missing the worst periods has a bigger impact on returns than participating in the best periods.

    Those same advisors tend to focus on “time in market” and “long-term portfolios” in a veiled effort to maximize assets under management (and fees). Market timing using a simple, objective plan has historically done substantially better than buy and hold. Search Amazon for the top books on market timing, study them, execute like a machine, and avoid advisors who are too lazy to do the work necessary to fulfill their fiduciary responsibility.

    • Pete as UK based advisers, we have to balance the rule of law, common sense, behavioiral decision making and the UK Financial Ombudsman Service when making reccomemdations to clients, as a result, whilst I get your point we pretty muc have to work how Scott has pitlined in his article. Clients don’t like loosing large amounts of money, hence diversification of asset class with MINOR tactical changes in asset allocation to reflect significant potential changes, such as Brexit is all we can do as advispry firms. With diacretionary permsissions we would be in a position to move in and out quicker, BUT as Scott said about stockbrockers and going to cash, that is more of a bet than an investment decision and I don’t bet and nor do my clients.

  3. sorry cant agree with Pete, I’ve been told of mystical magic powers before of timing markets, strange then how most fail, DFMs going into Brexit with 20 % plus in cash, who are still in cash desperate for a correction. Masterly inactivity actually works, but it does requite strong discipline. The idea that it is lazy is just so wrong!

  4. Absolutely right Scott, I too was horrified to read about the same adviser executing their ‘out’ strategy on the friday morning. As it turned out this would have been at the bottom of the dip (somehow doubt they got out ahead of the big boys). One wonders if they are back in yet!! Not looking so clever now are they! Also agree that the missing the 10 best days sales aid is bogus – totally meaningless. The whole brexit thing just shows you can’t tell what is going to happen. I learned this lesson many years ago when during the Russian crisis of 1998 I switched my biggest clients into cash as I was sure the market has peaked and we were seeing the long awaited meltdown. Then had a very uncomfortable 18 months watching the market go up!! – luckily came good in the end buying back in after TMT boom crashed.

  5. Forget who said it but it’s a classic: There are 2 types of investors; those who can’t time the market and those who don’t know they can’t time the market!

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