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So you think you can time the market?

Consider whether the odds are really in your favour.
Markets don’t ring a bell when they’re about to turn. In 2009 the S&P 500 began one of the strongest bull runs in history for no apparent reason. Image: Shutterstock

The latest unit trust statistics from the Association for Savings and Investment South Africa (Asisa) show that local investors moved a lot of money away from funds with exposure to equities during 2019. Instead, they preferred to invest in cash and bonds.

South Africa multi-asset income funds attracted R70.5 billion in net inflows for the year, while short term bond funds saw net inflows of R51 billion. South Africa equity general funds, on the other hand, felt net outflows of R13.5 billion, and there were net outflows of R2.1 billion from South Africa multi-asset high equity funds.

This suggests that many local investors have decided that they don’t like the prospects for stocks on the JSE. They would rather invest in the perceived safety of lower risk assets.

In the short term, they are certainly being rewarded. As the table below shows, multi-asset income funds, short term bond funds and even money market funds have all outperformed local equity funds, on average, over the past five years.

Source: Profile Media

However, investors shouldn’t ignore the longer term figures. Over 10 or 20 years, equity funds and multi-asset high equity funds are clearly the top-performing categories. This shows that over the long term, the stock market remains the best way to meaningfully grow your wealth.

Read: This is what long-term investing looks like

Taking a time-out

Many investors might respond to this by arguing that they are not moving out of the stock market permanently. They are just putting their money somewhere else while returns are so much better in bonds and cash.

They intend to move back to the JSE again when the time is right.

This seems like a perfectly reasonable strategy. Stock market returns have been poor, the risks on the local stock market seem high, and bonds and cash have been performing above inflation.

Read: Don’t let the markets fool you

The timing decision to get out of the market might therefore appear easy. Anyone who decided to move away from stocks in the past five years can probably feel like they made the right decision.

You have to be right twice

However, getting out of the market at the right time is only half of the equation. For this to be a successful strategy, you also need to know when to get back in again. And this is a lot harder than it sounds.

As PSG Asset Management chief investment officer Greg Hopkins reminded investors earlier this year: “Nobody ever rings the bell.”

Nothing illustrates this better than what happened on the US market in 2009.

This was the year after the great financial crisis, when the S&P 500 fell 38.5%. That made 2008 the worst year on the New York Stock Exchange since the Great Depression.

Going into 2009, there was no sign that things were improving. The growth estimate for the US economy at the start of the year was -2.9%, and unemployment had risen from 6.2% in August 2008 to 8.1% in February 2009.

The US economy even underperformed expectations in the first quarter of that year. The country’s GDP growth for the first three months of 2009 was -4.4%.

Nothing changed, and yet everything changed

There was nothing to suggest that the worst was over. In fact, the unemployment rate kept climbing for most of 2009. It peaked at 10.2% in October.

The stock market recovery, however, began on March 9. In the midst of this extremely poor news, the S&P 500 turned and began one of the strongest bull markets in history.

There was no catalyst for this, no obvious reason for the improvement, and no sign that it was, in fact, even happening at all.

Many investors regarded the uptick as nothing more than a temporary anomaly, and believed that the market still had further to fall.

Over the whole of 2009, however, the S&P 500 was up 26.5%. It made another double-digit gain in 2010, and over the course of that decade recorded annualised returns of 13.2%.

The odds

This shows how difficult it is to identify the right time to get back in to the market. There is rarely, if ever, anything to show that the correct moment has arrived.

As Methodical Investment Management pointed out in a recent note, many investors underestimate how difficult it is to get this right.

“A simple calculation proves that odds are not in your favour,” Methodical notes. “The best investors don’t even have a 55% success rate in getting their investment decisions right, but let’s say for example that you have a crystal ball and are able to get the calls right 60% of the time. To get it right twice (on exit and entry), you only have a 36% chance of making the right decision (60% x 60% = 36%).”

In other words, even someone who is an investment genius has only little more than a one-in-three chance of being correct. For ordinary mortals, the chance is really far lower than that.

As 36One Asset Management stated in a note to clients:

“If timing the market exactly were possible there would be a lot more yachts in the world. To consistently get the calls right takes resources unavailable to the average investor.”

The markets never warn you what they are going to do next. The best approach is therefore to get the odds in your favour as much as possible with a solid long term strategy.

Trying to time the market, however, is doing the opposite.

Read: It makes no difference whether the JSE went up or down today

 

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GARCH modellers assume that variance error is serially auto-correlated. This means that in times of an extreme downswing there is also a much stronger chance of an extreme upswing.

That may well be true for a stable economy. In the case of ZA, an upswing is remote or very long term.

The only timing you need with the JSE is your exit, as there is no sane reason to be in it.

Agree I got my timing spot on…………..sold Steinhoff at R1.20…..

pwgg, that begs the question, what did you buy at ? lol

Big difference between being in the ZA market and in the market. I no longer hold South African stocks and never will again. ETf’s in US stocks are doing very well. African Bank offers 10.62% on 49 months fixed.

Joe, the question is how much will you loose on that 10.62% over 4 years due to the depreciation of the Rand? My perdition is the Rand will be at the very best around 20 to the $ in 4 years time.

If you assume a rand$ of 15.30 and 20 in 4 years time – well that is 7% depreciation. So your us$ return is still 3.6% which is better than any US$ money market !!

Secondly there is no 10 year period where the rand has fallen by 7% p.a.

Oh wise onion !!!

I am 76, need some cash to supplement my pensions, and have plenty ETF’s.Sold 90% of my ZA stocks during the downswing and sitting on cash and fxed deposits.
Got a better idea?

Robot, not sure about your statement of no 10 yr period with that depreciation.

1 Jan 2006 10.87 to dollar
31 dec 2015 22.78 to dollar

just taken randomly from a chart but that looks like strong depreciation

Firstly I said at best, secondly just wait for 1) Land EWC to kick in 2) Moodys down grade 3) then factor in the massive risk that everyone seems to have forgotten about… That being David Mabuza will be about 12 to 18 months away from the pilot seat.

You say there is no 10 year period where the rand has fallen by 7% p.a…..watch this space robot, its gonna be ugly really ugly.

Joe, great move ETF’s are the way to go but I would try make sure the cash you are sitting on is in $, Pounds or Eruros not in Zar. Enjoy your retirement, I am nearly there….LOL

robot.

1st Jan 2020 USD to ZAR = R14.01,

9th Mar 2020 USD to ZAR R16.30,

are the lights on oh wise one?????

Diversification across fund managers and world regions is more important than timing which is not for the faint hearted.

Timing can improve the outcome when you are forced to sell with a 1 year time horizon or want to invest cash.

Warren Buffet times the market. In good times he hoards cash, like now, and when prices are low he buys big. Worked for him.

Benjamin Graham’s approach of security analysis (of whom Buffett is an adherent) has long been show to be a fallacy in a proper functioning market because of the efficient market hypothesis. In the 1950s already, Markowitz researched the combined aspect of the US market and invented Portfolio Theory. The notion researchers invoked was to have a portfolio of at least 500 stocks and to allow the drift of the market over time to do it’s work.
These same researcher’s advised a long term investment and steering clear of myopic risk aversion. Pension fund managers are the best positioned investors for this approach as their goal is to grow the pension fund over the span of many overlapping lives. i.e. they are forced to see the investment performance in centuries! Judging their investments by return over 3 year periods, as they do now, is perhaps still short sighted. 3 year assessments of investment performance are still too short. 10 to 12 year assessments would be better perhaps.

Getting the asset class allocation right for your circumstances and avoiding fickle and empotional decisions count for 90% of investment success. Try to time any market at your peril. Manage risk – market, asset class, geographical, institutional, etc.

The question is whether, in the South African market, past performance is an indicator of future performance. With the government hell bent on making us a carbon copy of Zim and Venezuela and all the other impediments to growth the government continually dreams up, I doubt it but I am no expert. EWC, NHI, ballooning government debt, bankrupt SOE’s and rampant corruption with no real political will to stem it and we must expect that despite this, the JSE will perform. I don’t have that much faith in the stock market. In my opinion it will only take off if there is a change in government or the booting of ministers implicated in grand looting together with a move away from SACP and COSATU inspired policy.

TaxBusta, all your points are very relevant but the one elephant in the room that everyone seems to be overlooking and that I think is a massive negative still to befall SA. David Mabuza will be in the driving seat in 5 years time. Now that is seriously scary, and people want to go long on SA?????

If he is driving the laundry cart in orange overalls around Pollsmoor – I think we might be heading in the right direction

@’S.O’ True. Thinking along same lines: here we have CR as Pres (who gets plenty of justified criticism) but WHO ELSE in the ANC has better leadership when (not if) CR steps down?

CR, despite all the general criticism, is still the “best apple among the whole rotten bunch” of ANC apples. We all create an image of SA’s long-term future prospects based on a (tempered) CR at the helm.

NOT defending CR at all, but THINK who can be NEXT. Fear the day when the likes of Ace Magashule tells SA “I’m ready to govern”…we will become poor. Very poor.

SA is probably in its best space currently with CR as leader (whether we like him or not). Can only go worse from here, long-term.
Ever thought about SA’s future IF Zuma ever gets re-elected by popular vote? In SA many things are possible. Hedge yourself. CR is temporary.

The strategy “buy in the dips, sell in the peaks” is in fact market timing. It works for some, but assumes there is a long-term trend underlying the cyclic, seasonal and random patterns. Usually but not always true.

Timing the market is like a professional golfing career, a brain surgeon, an astronaut or a professional farmer. Many people try, but less than one in a thousand succeed.

I time the market.

I’m 60% up over 4 years.

The question is “What market?”

Nobody can time perfectly, but one can be both prudent (take some money off the table) and attentive (the correction is now overdone and several stocks are dirt cheap).

These all in regard US equities – small concentrated portfolio of less than a dozen shares:
I was very careful already early 2007 and watched as my buddies bragged about their portfolios. Then came the crash and I was 95% cash.
I was attentive March 2009 and went 95% invested.
I was careful a bit early getting out Oct 2019. The market went up a lot since the exit but not a lot relative to 2009.

I trade maybe 20 times a decade and do not have the bandwidth to watch dozens of investments. The main metric I look at is forward looking price:operating cashflow. Other than normally two speculative bets (disrupters) all the shares are very very large companies and virtually exclusively ones with no history of taking write-offs or write-ups.

Journal entries are the original sin

As many stated before, the question is which market. I do not see the JSE as the way to go. But also not having everything in the US. I personally have investments in the US, UK and the EU (although the US do consist of +-50% of my offshore exposure and is my best performing country of investment incl ZA).

Regarding keeping one’s money in ZAR or getting it in foreign currencies, I personally am split. Money / Capital I would require over the next 2-3 years I keep in ZAR and in the money market. Any other money I keep in USD.

My ex financial adviser dumped me because I was correct about the onset of JSE correction and did not want to obey the rule of staying put regardless. A 5 year performance similar to money market from much higher risk profile of equities is nothing to be proud about in my book. The attitude of you cannot time the markets so do not even try is a cop out for incompetence and laziness.
Under my direct control the performance of my investment portfolio has been improved dramatically. My secret is to keep informed and apply common sense, full stop.

End of comments.

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