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Does ‘Market Timing’ Help or Hinder?

Does ‘Market Timing’ Help or Hinder?

The ever-rising increase in the amount of available financial 'news' and commentary with the accessibility of smartphones and dedicated platform accounts and apps, as well as a dramatic reduction in the hassle of trading in and out of shares, ETFs and funds, can increase the temptation to ‘time’ the market and trade in and out of investments. This is not the same as ‘rebalancing’, which is a core strategy for most prudent investors and involves a periodic – mostly at a set time/frequency – execution of trades to ensure a portfolio stays consistent the original mandate.

‘Timing’ Markets usually involves the purchase of stock or funds when they are on the rise and sale when prices have or are falling. They tend to be emotional trades based around fear & greed and no matter the rationale for avoiding this type of behaviour, the temptation is high. 

In the Financial Planning and Investment Management space, we use the term "behaviour gap", where investors tend to underperform the returns of the underlying funds they invest in, because they often buy after the fund has risen in value and sell when it falls.

The latest edition of Morningstar's annual "Mind the Gap" report shows that this trend is still prevalent, with the average ‘investor’ making a 6% return during the 10 years ending in December 2022, compared to a 7.7% return for the average fund, an annual "behaviour gap" of 1.7%. Looking at different fund types, the report found the largest gaps in more volatile funds, with these funds seeing a 1-percentage-point increase in the gap compared to less-volatile funds, as well as in sector funds. Fund categories where investors tended to fare better included large-cap growth and large-cap blend funds (which ranged from a slight gain of 0.10% to a gap of just –0.59%), as well as in broader-based asset allocation funds (i.e., those that invest in multiple asset classes, including stocks, bonds, and cash).

Altogether, these results show that even though investors may be doing better in sticking with their 'core' holdings (e.g., asset-allocation funds and broad-based large-cap funds), they may still succumb to the behaviour gap (and temptation to trade), especially when it comes to more volatile investments. We see our role as adding particular value to clients by helping them stick with the most volatile elements of their diversified portfolio.


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