Time in the market

Time in the market vs. Timing the market

A quick google of sensible places to invest one's excess cash quickly brings back article after article extolling the virtues of the stock market. The Barclays gilt study tells us that over the long term investing in the stock market provides the greatest return over other asset classes. That takes care of where to invest. But how should I do it?

This is usually presented as the need to decide on one of two approaches:

• Time in the market
• Timing the market

Time in the market

On one side there is the buy and hold camp – who suggest drip feeding a small amount regularly into your investments. Don’t look at the news. Come back in a few years to a (hopefully) healthy pile of profits. Time in the market is more important than trying to time the market, because people typically aren’t very good at it. And we’re told that missing the small number of best trading days have a massive impact on returns.

Timing the market 

In the other camp are those that advocate more activity, not necessarily trying to flip stocks over short time frames, but buying and holding for a while, then sell for a profit. In other words, not simply time in the market, but timing it. After all if you suspect that your investments have peaked, why sit there and watch those profits all disappear as Mr Market throws a tantrum?

A closer look

I’m a UK investor and my starting point is the London stock market, I'll take the FTSE100 as it's the driving force behind the UK indices – as I’ve noted here the UK indices have a few interesting characteristics. But it’s where the majority of my investments are, and will likely continue to be, so that's where I'll focus my attention.

I’ve taken monthly data for 10 years, the last 10 full years from 2009 – 2018. It turns out that across that period, the biggest monthly gains are between 6% and 8.5%. There are 11 months that fall into that size of gain, 7 of them in 2009 and 2010, perhaps reflecting the recovery from the financial crisis. (I’m ignoring dividends for this)

The gain from 2009 – 2018 was around 47%, a £10000 investment would have increased to £14749.

Missing those 11 months would indeed have a significant impact on the investment. It would have resulted in a loss, -30%. The same £10000 would have ended up being worth £7045.

FTSE100 2009 to 2018 missing the best months

So it would appear to be correct, using this data at least, missing the 11 months with the highest gains would indeed have made a real difference - turning a decent return into a loss. We never seem to hear a related question though: what if we missed the worst trading days?

The 11 months in my data that have the largest losses range from -5% to -9%. These are more evenly distributed across the years. What would happen to our £10000 if we manage to miss these 11 months? Now the £10000 increases to £31077 - that's a 211% return, more than doubling the result from leaving the money invested every day.

FTSE100 2009 to 2018 missing the worst months

The calamitous impact on one's investment should one be foolhardy enough to try to time the market now looks a little less clear cut. Miss some of those big dips and you could be looking at much better gains.

My activity is limited, partly through having a job and a family and therefore relatively limited time to dedicate to doing this. In part it’s fear and laziness. I feel I would need a scientific and systematic approach, and don’t really know where to start. So I’m more in the camp of simply leaving money invested in (hopefully) good companies, and just leaving those investments to do their thing. As I noted here, had I tried to time the market when we had a big market sell off towards the end of 2018, I'm not sure when I would have jumped back in once I'd sold. So I guess I'm a time in the market kind of chap, at least for the moment.