Time in the market vs. timing the market

One of the greatest temptations in investing is to try to time when to be in or out of markets.  It is logical to want to be fully invested in the equity markets when they are going up and to be in cash when they are going down. Yet logic transforms into emotion at times when markets feel a little bit frothy on the upside, such as the late 1990s or even 2020-21, or full of gloom and despair on the downside, such as the depths of 2003 (technology crash), 2008-9 (global financial crisis), or even Q1 2020 (Covid). It is worth remembering that every decision to get out of equities also requires a decision on when to get back in, and vice versa.  It would be great news if there was a clear signal that allowed us to make these calls, but as the great John C. Bogle, the founder of Vanguard once said:

‘Sure, it would be great to get out of the market at the high and back in at the low. But in 55 years in the business, I not only have never met anybody that knew how to do it, I’ve never met anybody who met anybody that knew how to do it.’

Perhaps this should be no surprise, given that markets do a pretty good job of incorporating new information into prices quickly and that would include any signal indicating that now is the time to get out of (or into) equity markets!  Any new information is, by definition, a random event. 

Let’s run a quick market timing experiment.  If we take the annual returns of the developed equity markets and cash from 1972 to 2021, we can look at three naïve strategies.

  • Buy-hold-rebalance: this simply takes 50% of the equity return and the cash return every year.
  • Market timing strategy 1 – ‘On a roll’: if the previous year’s equity return is higher than the median return of all years[1], allocate 100% equities, if not allocate 100% to cash.
  • Market timing strategy 2 – ‘Contrarian’:  if the previous year’s equity return is lower than the median return of all years, allocate 100% equities, if not allocate 100% to cash.
Data source: MSCI World Index (net. Div.) in GBP plus UK 1 month T-Bills (cash), from Dimensional Returns Web © All rights reserved. No costs deducted of any kind. This analysis is for illustrative purposes only.

From this limited and somewhat naïve experiment, we can see that for this period of capital market history the timing strategies would have yielded little return benefit, but with materially higher risk, as measured by portfolio volatility. Market timing strategies, in real life, may come with other material risks and costs, such as time out of the market when buying and selling and thereby missing the few days that make a major contribution to positive market returns, incurring the transaction costs of buying and selling and potential tax consequences.

According to Dimensional Fund Advisers, from 1990 to the end of 2020, US$1,000 invested in the US equities (S&P 500 Index) would have grown to around US$20,451.  Yet missing the best 15 days throughout this whole period delivered around US$7,080.  Missing the next 10 best days reduced the growth to US$4,376.  Cash returned US$2,245[2].

Other periods, or other strategies, might well result in different outcomes, but that – to some extent – is the point. There are no simple ways to time markets.  Even if an investor does not believe that they can time markets, the temptation is to believe that some professional fund managers have complex models (or intuitive skill) that allow them to do so.  Unfortunately, research suggests that these skilled managers are few and far between.  One such global study of professional multi-asset fund managers[3], who have the scope within their mandates to time markets, came to the following conclusion:

‘Overall…we find evidence of only a tiny minority of funds with asset class timing ability.’

Oh dear! The challenge of how to sort the wheat from the chaff should not be underestimated. The sage advice of Warren Buffett[4] – acknowledged as one of the world’s great investors – is also worth reflecting on.

‘Investors, of course, can, by their own behavior make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers…can destroy the decent returns that a life-long owner of equities would otherwise enjoy.’

Time in the market is preferable to timing the market for longer-term investors seeking a successful investment experience. Stick with it!

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.


[1] In reality, of course, one would not know the median return ex-ante. This is for illustrative purposes only.

[2]    Dimensional Fund Advisers (2021), Reacting can hurt performance, Performance of the S&P500 Index, Jan 1990 to December 2020.  , Corporate website. 

[3]    Clare, Andrew and O’Sullivan, Niall and Sherman, Meadhbh and Thomas, Steve, Multi-Asset Class Mutual Funds: Can They Time the Market? Evidence from the US, UK and Canada (April 2, 2015). Available at SSRN: http://ssrn.com/abstract=2589043

[4]    Warren Buffett (2014) Berkshire Hathaway Shareholder Letter. https://www.berkshirehathaway.com/letters/letters.html