The Best Time to Buy (or Sell)
Investment wisdom begins with the realisation that long-term returns are the only ones that matter.
The perennial question on every investor’s mind: When is the best time to invest? There is no shortage of uncertainty and frightening events which could seemingly upend your investment portfolio in a jiffy. The common refrain would be to wait till things look clearer to invest; or rather to wait for the ‘best time’ to put your money to work. But the truth is you don’t need to wait for the best time to still get good results.
Since 1975 till the end of 2021, $1 put into global stocks would have turned into $21. That is an annualised return of approximately 6.8% after accounting for inflation. This return includes periods of high valuations, low valuations, high inflation, low inflation, rising rates, falling rates, wars, pandemics, bubbles; the list goes on. Returns after accounting for inflation for Singapore stocks was around 5% and Singapore property, 4.6%. Not too shabby, but trailing global stocks by a margin (see chart below).
It is the dream of every investor to be able to invest at the valleys of the market - buying low. But you may be surprised to know that over a long time horizon, a well-timed investment really does not make much of a difference.
Here is a story of three sisters; Ellie, Ella and Elaine. (The story, all names, characters, and incidents portrayed in this production are fictitious. No identification with actual persons, living or deceased, is intended or should be inferred.) The year was 1988. All three sisters wanted to invest $1,000 a year over the long term to build up their savings and wealth.
Ellie was a terrible market timer — she had the worst luck of all, always investing her $1,000 at the highest price in the stock market in that particular year. The red lines overlaid on the chart below shows when she put her $1,000 into action.
Ella on the other hand was one of the best market timers around. Whether it was luck or pure skill, she always managed to put her $1,000 into stocks when the market was at its lowest point in that particular year. The green lines overlaid on the chart below shows her entry points.
Finally on to Elaine. She really didn’t want to bother and think about when to buy in. She simply did it on the first day of every calendar year.
So who do you think did the best? Well obviously it was Ella, but the end results may surprise you — her returns were not very significantly different from the other two.
The total capital invested for all 3 of them was $34,000, and below you can see the end result.
Even Ellie the worst market timer, with the worst luck, more than doubled her money — 220% — over the period with an annualised return of 4.14%. Ella the best market timer was just shy of tripling it — 280% — with an annualised 5.18% return. Elaine, who was the most indifferent of the lot did decently — 250% — with an annualised return of 4.58%.
We all know that perfect market timing is quite impossible to pull off, although that’s not to say that no one has managed to do it in the past. This fun example above just shows that you really don’t need perfect timing to get a good return over the long term. A common but perennial issue when trying to decide when to get in is that it can be extremely psychologically draining. Market timing requires two great decisions. If you are invested — you need to decide when to sell (hopefully, of course, at a high price). Then, you really need to decide when to get back in (obviously at a lower price). Even if you get half of the equation right, the mental weight of thinking about the other part is a burden. If stocks fall further and you bought in, you would be kicking yourself, wondering if you should sell instead. If stocks continued to rise and you were not invested, FOMO is a real thing. Sitting in cash is the best feeling in the world when markets are collapsing, but conversely, it’s a really stressful position to be in when everything is going up instead.
If you want to find out more about our systematic rules based processes used for our investment portfolios, are unsure about the market situation now and want a second opinion, come and chat with us.
