Why timing the market is a fool’s game

During bouts of market volatility, we often get questions from our clients about what changes we have made to our funds and whether it is a good idea for them to try and time the market. Despite how tempting it can be to sell during periods of uncertainty, making changes in the face of volatility is often counterproductive, especially given how much noise exists in the market. To help filter out this noise, it is essential to have a framework in place that can be used to look beyond current market conditions. Below, we look at some key things to remember when faced with market volatility and what that means in the context of our own investment framework.

As an old saying goes “In theory, theory and practice are the same. In practice, they are not.” The plausibility of timing the market is a frequently broached topic in financial literature and almost always the conclusion is that it is nearly impossible to get right. What makes timing the market so tricky is that you must get it right twice - once on the way down and then again on the way up. Selling your holdings too late or buying them back too early often results in worse returns than if you had just held on throughout. After all, how can you be sure that the market has peaked or that the worst is over?

In hindsight, the relative peaks and troughs during market shocks appear obvious, but in the moment, what comes next can be incredibly hard to predict. A great example of how hard it can be to predict price floors and ceilings is to look at how markets reacted during the events of the Second World War.

Turning points are never obvious