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Scott Gallacher: Timing the market is still a fool’s errand

Scott Gallacher

Last year was certainly full of surprises. If only I’d had the foresight to bet a pound on my football team Leicester City to win the Premier League, the UK to vote to leave the EU and Donald Trump to claim victory at the US elections, I would be able to retire.

Yet despite our inability to predict the future, some advisers are gambling much more than a pound, with many intent on making big bets with their clients’ money (and future) in trying to time the market.

Last January, Royal Bank of Scotland caused panic by warning we faced a “cataclysmic year” and advised clients to “sell everything”. Yes, the same RBS that had to be bailed out by the UK taxpayer during the banking crisis. Safe to say I chose to ignore their “expert” opinion.

Regardless of your politics, most would agree it was shocking year in terms of election results. But it was not in terms of investment returns.

While the markets did fall slightly at the start of the year, it was nothing like the cataclysmic 12 months predicted by RBS.

Provided you ignored the bank’s “advice”, the average investor (taken as the average Mixed Investment 40-85% Shares retail unit trust/Oeic return) would have finished the year approximately 16 per cent up.

“Despite our inability to predict the future, some advisers are gambling much more than a pound, with many intent on making big bets with their clients’ money (and future) in trying to time the market.”

Tough decisions ahead

To be fair to RBS, it is not alone in predictions of doom or attempts to time the market. Last year, I wrote of the “fool’s errand of market timing” and one IFA who advised all his clients to switch half into cash the morning after the Brexit vote.

Naturally, he would have fared no better than RBS with his market timing. By switching 50 per cent to cash, the average investor (his clients) would have missed 12 per cent growth since the referendum. If he at least had the good sense to keep the other 50 per cent invested, his clients would still be 6 per cent worse off as a result of his advice.

He and his clients would now face a difficult choice. Do they hold out in hope of a significant market fall so they can reinvest at a lower point than they left it?

I suspect when (or if) this fall comes, they may miss their opportunity, as investing will look even scarier. So do they admit their mistake and bite the bullet by reinvesting today and effectively realising that 6 per cent loss?

Whether it is just that the market has gone up for “x” number of years, or that it is over-valued by a particular metric, there will always be someone claiming it is best to switch to cash. Occasionally, they may even be correct. After all, even a stopped clock is correct twice a day. In the long run, though, it is surely a losing strategy.

To be clear, I do not claim to have known the market would finish 2016 significantly higher. Nor do I claim to know it will not crash in 2017. But I do know markets tend to rise over time and, if I have to bet, I would rather bet with it than against it.

Scott Gallacher is director of Rowley Turton 

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. I think some advisers need to realise that, given the number of asset options available, we are not best placed to predict where growth is going to be. We’re not even best placed to predict which funds will do best or even above average. No one knows what is in store. All we can do is explain to our clients how markets work and what investment journey they can expect over the longer term. I will continue to stick with the adage – “It’s not timing the markets, it’s time in the markets.”

  2. Why not just be honest and say “please leave your assets under my management so that you help maximize my income?”

    Or perhaps “experience has taught us that few investors have the intestinal fortitude to ride out the short-term losses that market timing generates on its way to long-term gains so just leave your assets under my management and I’ll try to get you as close to the market return as possible–less my fees of course.”

    Whenever an adviser starts using the usual defenses for buy-and-hope we should all acknowledge that they are really just asking for us to leave our money alone and stop disrupting their income. Whether its “time in the market is better than timing the market” or “timing is correct occasionally–even a stopped clock is correct twice a day” or “missing just the ten best days during the past 10 years would have decreased your annual return from over 9% to less than 6%” they all attempt to shift our focus from the whole story.

    Please note that I am not talking about trying to capitalize on events like the Brexit vote or the American elections. The impact of such short-term events tends to get erased quickly and has little to do with legitimate market timing strategies.

    Earning a long term CAGR that is substantially better than that generated by maximizing your advisor’s assets under management (buy & hope) has been proven to be likely when using mechanical trend following tactics that help avoid the major drawdowns experienced during the worst months and using various factors such as value and momentum to optimize trading decisions. The research papers and books are easily accessible for anybody willing to do the work. The difficult part is checking your emotions when the inevitable whipsaws cause temporary underperformance…

    • Peter

      You made it sound complicated. The truth is out there, timing the market works only in hindsight.

      It is made of two decisions too, cashing investments and getting back into the market. Both decisions need to work to get an advantage.

      I have taken recently a client from a London IFA firm who has DFM permissions as well. They timed the market and disinvested 60% of the client portfolio before the US elections. They thought that Donald Trump will become US President and they got this right!

      However it is not enough to get the binary event right, you need to figure out how the markets will react afterwards. In this particular case they weren’t so right and the stock markets liked Donald’s message and went up, quite a lot. Now they have a bigger problem, getting back into the market.

      For me it was the easier pitch ever, I have just said to the client: “look, timing the markets do not work and your portfolio is the best example”.

      The talk about “asset under management” is non-sense. People could choose to self-invest at any time and nobody could stop them. They can vote with their feet.

    • “…using mechanical trend following tactics..”

      Another day, another fool

  3. Pete
    We were talking about timing the market not what advisers do on the whole. Obviously we would conduct annual reviews and if the correct course of action for an individual client was to disinvest then I would be the first person to recommend that. Other than that we will not get into conversations about whether or not it is a good time to invest.

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