Time vs Timing: Why your ‘call’ isn’t as useful as you think

After every significant market correction, the media and its clickbait headlines will inevitably point to a particular market pundit who ‘called it right’. It makes sense, the media are in the business of views, and like it or not human beings find the idea of ‘timing the market’ to be appealing. What the media doesn’t point out, is how that same pundit called the next correction, spoiler alert, rarely do their ‘calls’ strike twice.

The reality is that even the most sophisticated investors will only get it partly correct and a few will get it horribly wrong. When looking at some of the most significant calls of recent times, it’s hard to go past Michael Burry’s bet against the US housing market in 2007. The call, which was later turned into a Hollywood blockbuster The Big Short, details the lead up to the Global Financial Crisis (GFC) of 2007 and makes out Burry to be nothing short of a market savant.

However, no headlines are written about how many times Michael Burry has called for an impending stock market collapse since, which simply did not eventuate. The most recent being this since deleted tweet in January 2023. For those playing at home the S&P500 rallied ~20% in the 12 months following.

Source: X.com @Michaeljburry January 2023

Before you think this is simply a Burry hit piece, he’s not alone. In most cases it is likely that the manager who gets their timing just right will have been wrong for a period before the dislocation. This brings to mind an old market adage is “to be early and wrong are indistinguishable” – after all if you don’t participate in the bull run before the correction, there’s a chance your windfall didn’t outweigh the lost earnings while you waited for it to happen.

So, how can individual investors achieve the best returns and "time the market" effectively to attain wealth? The key lies not in timing the market but rather in spending time in the market. Let me illustrate with some data and anecdotes. Consider a family member of mine who invested $2k in a fund their child and forgot about it amidst the busyness of life. Upon rediscovering the investment in 2008, after 19 years, its value had surged to over $30k—a remarkable 7.5x return. Despite experiencing a 50% drawdown at one point, holding onto the investment proved rewarding. Had he known about it, he most likely would have panicked and sold during the downturn, missing out on substantial gains in the subsequent years.

In investing, short-term outcomes may appear uncertain. But over an extended period, the probability of success tilts increasingly in favour of the investor. Thus, the key to achieving solid portfolio returns lies in remaining invested over time, rather than attempting to time the market. Looking at historical S&P 500 data we find that:

·        On a given day it is a coin toss as to whether you receive a positive return.

·        In a full year there is about a 74% chance your portfolio has a positive return.

·        With a decade long horizon your chances of a good outcome are better than 94%, and

·        Extend your timeframe to 20 years and you will almost certainly receive positive returns.

S&P 500 Returns: 1926 – 2015

Timeframe	Positive	Negative
1 Day	54%	46%
3 Months	68%	32%
1 Year	74%	26%
5 Years	86%	14%
10 Years	94%	6%
20 Years	100%	0%

Source: Yahoo Finance 2024

And even if you’re still not convinced, a study conducted by London-based fund manager Albert Bridge Capital challenges the assumption that time AND good timing is an important determiner of success. The study reveals that over long-time frames and with consistent reinvestment, the absolute worst market timer fares nearly as well as the very best. For instance, an investor allocating $1000 to the S&P 500 at its peak each year from 1989 to 2018 would accumulate a portfolio worth almost $122k, while one investing at its lowest point would amass $155k. This trend holds across multiple 30-year periods, suggesting that even precise market timing yields less substantial benefits than commonly assumed.

There are also a bunch of other hidden costs that people fail to account for. Market timers encounter considerable hurdles, including high transaction costs, realised tax events, elevated accountancy fees, and the daunting task of determining when to reinvest. The last point is not one to be looked over, while it's relatively straightforward to move entirely to cash, summoning the courage to re-enter the market at the bottom (or when everyone else is selling) is another matter entirely. Markets anticipate future developments and factor them into present asset prices, whereas investors often rely on past experiences. Consequently, those sitting in cash find it challenging to reinvest if they miss the initial stages of a rally. Despite intentions to buy during a 10% market pullback, there's no guarantee it will occur, leading some investors to remain in cash for extended periods of time, outweighing any outperformance they achieved by selling at the right time.

Given the challenges of timing the market, what's the alternative for investors? At Bratton we embrace a long-term investment approach. These strategies provide a framework for navigating market cycles, staying invested, and increasing the likelihood of achieving satisfactory returns. It's worth noting that advocating for ‘time in the market’ doesn't imply endorsing a passive, set-and-forget approach. Adjustments are often necessary, such as holding more cash during certain periods or reallocating assets based on evolving risk-reward dynamics. This is where your Bratton Wealth adviser comes into their own, providing adaptability while also focusing on long-term goals of clients.

If you’re interested in seeing how Bratton Wealth can manage your financial success, please reach out and we’d be happy to walk you through our offering in more detail.