Timing Invesmtents?
Timing Investments?
It’s a well known saying that you cannot “time” markets and that you would be better off simply buying and holding an investment through thick and thin. In our view the truth is somewhere in between!
The low cost “buy and hold” strategy would work tremendously well if you discovered it in 2003 or 2009 as markets recovered from multi-year lows; however, would you have been such a committed advocate if you had started this strategy in 2000 or 2008 at market peaks?
In the excellent book “The Ivy Portfolio”[1] Chapter 7 Winning by Not Losing puts forward the concept of a simple price-based system of buying and holding an investment when its price is above its 10-month average and selling when its below and moving funds to cash.
To ensure that investors do not get caught up in frequent trading any action to buy or sell is only taken at the end of each month. Firstly, we look at the United States Equity Market between 1994 and 2019 and can see that the timing portfolio outperforms returning 9.76% p.a. compared to 9.44% p.a. from a buy and hold strategy.
The increase in returns is modest but the risk and effect on investor psyche is well worth it with risk (standard deviation) around a third lower and the worst annual decline was 7% compared to a whopping 37% for the buy and hold approach - importantly both approaches enjoyed the best year of 33% so the Timing Portfolio didn’t cause investors to miss out on recoveries.
The table below provides some more detail on how each strategy worked at the major equity inflexion points we mentioned.
|
Start Date |
Strategy |
Annualised Return |
Standard Deviation |
Best Year |
Worst Year |
|
|
|
|
|
|
|
|
1994 (start) |
Buy & Hold |
9.44% |
14.81% |
35.79% |
-37.04% |
|
Timing |
9.76% |
10.55% |
35.79% |
-7.00% |
|
|
|
|
|
|
|
|
|
2000 |
Buy & Hold |
5.92% |
14.97% |
33.35% |
-37.04% |
|
Timing |
7.64% |
9.52% |
33.35% |
-7.00% |
|
|
|
|
|
|
|
|
|
2003 |
Buy & Hold |
10.01% |
13.93% |
33.35% |
-37.04% |
|
Timing |
9.25% |
9.60% |
33.35% |
-7.00% |
|
|
|
|
|
|
|
|
|
2007 |
Buy & Hold |
8.44% |
15.55% |
33.35% |
-37.04% |
|
Timing |
7.92% |
10.10% |
33.35% |
-7.00% |
|
|
|
|
|
|
|
|
|
2009 |
Buy & Hold |
14.07% |
14.08% |
33.35% |
-5.26% |
|
Timing |
8.53% |
10.54% |
33.35% |
-7.00% |
At certain points buy & hold works better but, few would have been brave enough to start such a strategy in 2003 of 2009.
It also turns out this simple strategy can add long term value across other asset classes as the table below demonstrates – for simplicity a common start date of 1996 has been used.
| Asset | Strategy | Annualised Return | Standard Deviation | Best Year | Worst Year |
| Emerging Market Equity | Buy & Hold | 6.05% | 22.86% | 75.98% | -52.81% |
| Timing | 8.34% | 14.59% | 63.95% | -18.02% | |
| European Equity | Buy & Hold | 6.30% | 17.59% | 38.70% | -44.73% |
| Timing | 7.52% | 11.68% | 35.16% | -15.61% | |
| Pacific Equity | Buy & Hold | 2.32% | 17.02% | 57.05% | -34.36% |
| Timing | 5.56% | 11.29% | 57.05% | -18.65% | |
| US Bond Market | Buy & Hold | 4.91% | 3.46% | 11.39% | -2.26% |
| Timing | 4.43% | 3.16% | 10.57% | -1.44% |
Looking at equities their appears significant value in a timing strategy both in returns and risk reduction; however, there are only modest improvements when considering the Bond Market.
Overall we feel the main benefit from the timing strategy is avoiding the big annual losses without sacrificing a reasonable rate of return and surely that should be a good thing for investors?
[1] The Ivy Portfolio How to Invest Like the Top Endowments and Avoid Bear Markets - 2009 - Mebane T.Faber & Eric W. Richardson
