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Demystifying market timing
Trying to time investments to take advantage of the market's ups and downs is fiendishly difficult. It's an approach that's best avoided if you don't have the right tools.
In theory, it’s an appealing strategy. By anticipating the financial market’s next move, whether that’s selling investments ahead of a sharp decline or buying them just before a strong rally, investors have the possibility of reaping significant rewards.
It’s just a shame that such a tactical approach – known as market timing –doesn’t work out quite so well in practice for the majority of investors. It is one thing to actively manage a portfolio strategically but quite another to take on risks based on one’s own intuition of where the market is heading in the very near term.
In its most extreme form, market timing has similarities to blackjack - the skill lies in knowing exactly when to stick or twist in order to beat the house. If you’re not an exceptionally skilled player, the probability of bettering the dealer as the game progresses is negligible to say the least.
Indeed, studies have shown that trying to time the market can be bad for your financial health over the long run.
The bull and the bear
Bull and bear markets of the past 40 years: S&P 500 Index
Source: Bloomberg, Standard & Poor's, JP Morgan; data shown is in price return terms, covering period 31.12.1972-31.12.2019
In fact, research shows that one of the biggest risks of market timing is the cost of remaining un-invested, even for short periods.
For instance, as a recent US study demonstrated1, if investors had put USD100,000 into a fund of US stocks over the period 1996 to 2016 and left their portfolio alone, their investment would have grown to USD440,000. If, instead, they had opted to try to time the market and, say, had missed out on just 10 of the US stock market’s best trading days over that period, their investment would have grown to just USD219,000.
That’s a significant shortfall.
All this is not to say market timing is devoid of merit. It can work well for skilled, experienced investors - those who have invested through several market cycles and are able to collate and analyse huge volumes of data and identify market-moving trends before they gain momentum.
More generally, though, a better approach is to cleave to what history shows us: which is that, to have a greater chance of investment success, it is better to build and maintain a diversified portfolio of investments.
As the legendary investor Peter Lynch once observed: “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc. is registered as Portfolio Manager authorised to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.