Timing the market, buying or selling based on predicting future price movement, is risky, and consistent success is practically impossible. David Quinn of Investwise argues that a long-term approach delivers the better return

After nine years of relatively smooth gains in the stock market, it appeared like all hell broke loose in early October last year. Stumbling trade talks between the US and China were the main catalyst, with concerns that tariffs and friction in global trade would lead to lower economic growth. 

There was also a widely held perception that markets were over-valued, and this led to a 14% fall in global markets between October and December last. Media headlines grabbed attention, with doom and gloom about bear markets, crashes, and billions being wiped off markets. 

It is very easy to be distracted by this noise and let short-term market movements influence financial plans. It is natural to worry, and temptation is strong to try and time markets, to sell out and wait for a recovery. But the overriding experience of seasoned investors is that it is important to resist these urges and stick to the plan.

Long Averages Over 8%

Stock markets tend to fall a quarter of the time, on average, and corrections of roughly 10% happen almost every year. In the long run, equities tend to give investors strong returns, with long term averages well above 8%, when dividends are reinvested. This average annual return includes all the various crashes throughout history. 

In Association with

Investing in the stock markets is very simple, but not easy. It is difficult to ignore the short-term news and keep focused on these excellent long term returns. 

For medium and long term portfolios, such as a pension for example, we must accept short term volatility as a natural function of capital markets. We have to understand that they will recover in time, if we have the patience to ride-out short term turbulence. 

I know personally, from over 20 years’ experience in the investment industry, that it is extremely difficult, if not impossible, to time markets correctly. And yet I do have to resist the urge, on occasion, to do so myself.

Successful timing requires not just one but two accurate calls on market movement. Firstly the investor must sell out while markets are high. The danger is that you sell too early and miss some of the strongest growth. This is certainly the case for anyone who sold out in the past few years, on advice from market commentators and economists who suggested markets were over-valued. 

Selling is the easier call, though. It is much harder to decide when to re-invest. The market doesn’t fall and recover in a nice V shape. It tends to have false recoveries, and then, when it does start to recover, significant gains are made very quickly. 

In the last crash, the market hit the bottom on 9 March 2009. Most investors missed the significant recovery that occurred between March and June of 2009, where equities had a 30% gain. 

Many Irish investors stayed in cash, worried about the impending bank crisis and they missed the best early gains. With further uncertainty in markets in 2011, many never got back into equities at all. This is part of the reason we have over €100 billion in deposit accounts in Ireland today. 

A Timing Gamble

The decisions around buying low and trying to sell high, according to market sentiment or the anticipated rise or fall in markets, is essentially a timing gamble. Investors hit it right every once in a while. But earning a profit from timing the market repeatedly is a pipe-dream for most.

For those worried about investing at the top, consider the investor who started an equity investment in June 2007, right at the top of the last bull-run. If they kept their focus, and ignored the short term bad news from 2007-2010, they have now more than doubled their money. And this is after an initial ‘troubling’ 50% fall in value.

With short-term investment decisions, another typical behavioural bias is to consider what has worked in the recent past, and locally. The demand for investment property here is still strong, and many investors that I meet see it as a better bet than equities in the current economic climate. 

Rents are high and property values are still rising. However, experience and the long term track record would indicate that property offers lower long term returns than equities. Rents will have to revert to the mean, and affordability will restrict future capital growth.

We saw this in the past, and yet we are still heavily influenced by more recent trends. If we look back to that same investor in 2007, had they invested in property during that faithful summer, they would still not have broken even — 12 years later.

• David Quinn is Managing Director of Investwise, a financial advisory firm that operates a fee-only non-commission advice service.