August 02, 2019
Andrew Marchant

Why is Market Timing so Difficult?

Attempting to buy individual stocks or make tactical asset allocation changes at exactly the “right” time presents investors with substantial challenges.  Buyers and sellers in markets are generally motivated to trade by some sort news or analysis – be it economic data, stock research, or their own hunch or preference. 

In 2018, a daily average of $462.8 billion in equity trading took place around the world. The combined effect of all this buying and selling is that lots and lots of information, is quickly incorporated into market prices.

Trying to time the market based on an article from this morning’s newspaper or a segment from financial television might be unwise. It’s likely that your information is already reflected in prices by the time you can react to it.  Research indicates that even professional investors have difficulty beating the market. Standard & Poor’s research finds that over the last 10 years to December 2018,  83% of Australian equity funds, 91% of international equity funds and 71% of Australian fixed income funds failed beat their benchmarks after costs.

This doesn’t suggest that these professionals aren’t highly informed and adept investors, rather it suggests that modern capital markets have become very good at pricing in available information – making it difficult, even for the professionals, to second guess mark valuations.  Further complicating matters, for investors to have a shot at successfully timing the market, they must make the call to buy or sell stocks correctly not just once, but twice. Professor Robert Merton, a Nobel laureate, said it well in a recent interview:   

“Timing markets is the dream of everybody. Suppose I could verify that I’m a ‘70% hitter’ in calling market returns. That’s pretty good; you’d hire me right away. But to be a good market timer, you’ve got to do it twice. What if the chances of me getting it right were independent each time? They’re not. But if they were, that’s 0.7 times 0.7. That’s less than 50-50. So, market timing is horribly difficult to do.”

Too Scared to Jump In?

With the Australian share market near record highs, some people may feel reluctant to invest and prefer instead to wait until the outlook feels more certain. However the difficulty with this strategy is that there is generally an opportunity cost of not being invested, and no one has come up [Read More]

August 02, 2019