Market Timing – When to Enter the Markets

June 17, 2019 | Michael Tse


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Timing may not matter as much as you think.

Over the years, we have had many conversations with investors about market timing, attempting to find the most optimal time to put new money to work in portfolios. When markets are more volatile, this question tends to be more challenging to many investors. Some use a fundamental approach and some look at technical indicators to gauge the optimal time to enter the markets in hopes of avoiding contributing at the wrong time. This creates a degree of decision paralysis and could cause investors to miss market gains due to the fear of mistiming the markets.

Market timing may not matter as much as one thinks. Historic data shows that the best time to enter the market may actually be when you have the money to invest. To help illustrate this point, the chart below depicts three return scenarios of the S&P 500 going back to 1966. Each individual started with an initial deposit of $10,000 and thereafter contributed $1,200 annually. The difference between the scenarios are as follows:

Blue Line – Every annual contribution was perfectly timed and made at the annual lows.

Orange Line – Every annual contribution was not perfectly timed and made at annual highs.

Grey Line – Every annual contribution was systematic and made at the beginning of each year.

It may come as a surprise to many investors, but the three different scenarios generated a relatively small difference in ending value. The difference between the investor that executed with perfect timing compared to the one that perfectly mistimed the market is small. There is a 17.6% difference, which may initially seem sizeable, however, over a 52-year period, this translates into an annualized 0.3% difference each year. Also, one should keep in mind that it is virtually impossible to execute and time the market perfectly over a period of 52 years. The difference between perfect market timing and systematic approach is even smaller at 8.4%, or 0.16% annualized.

The same scenario holds true even when the markets are flat, as illustrated in the graph below.

Hence, the inference can be made that market timing is not significant in the long run. Rather, the value of compounding returns over a long period of time is a much more impactful determinant of returns. In the short term, the markets can and will act irrationally. Over the long term, staying invested with a disciplined approach is what will truly dictate a portfolio’s returns.

investors and clients should feel liberated and can stop worrying about timing short-term market fluctuations. The concept that “time in the market” matters more than “timing the market” should not be forgotten during volatile seasons. Our team recognizes that there are unique circumstances in which market timing and taking a more measured approach to becoming fully invested is prudent. However, investors may be doing a disservice to their long-term returns by waiting for the “best moment” to invest. So, if you are one that is waiting for that opportunistic time, you may want to speak with your advisor to review your strategy and find solutions that take market timing out of the equation.