![]() Looking only on a calendar year basis, data back to 1900 indicates the probability of a loss slides to just 20% in Australian shares and 26% for US shares. But if you only look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time. So day by day, it’s pretty much a coin toss as to whether you will get good news or bad news. See the next chart for Australian and US shares. If you look at the daily movements in the share market, they are down almost as much as they are up, with only just over 50% of days seeing positive gains. Key message: market timing is great if you can get it right, but without a process the risk of getting it wrong is very high and, if so, it can destroy your longer-term returns. Hence the old cliché that “it’s time in that matters, not timing”. If you miss the 40 best days, it drops to just 3.3% pa. For example, if by trying to time the market you miss the 10 best days (blue bars), the return falls to 7.4% pa. But this is very hard to do, and many investors only get out after the bad returns have occurred, just in time to miss some of the best days and so end up damaging their longer term returns. If you avoided the 40 worst days, it would have been boosted to 17.5% pa. If by trying to time the market you avoided the 10 worst days (yellow bars), you would have boosted your return to 12.5% pa. The next chart shows that if you were fully invested in Australian shares from January 1995, you would have returned 9.5%pa (including dividends but not allowing for franking credits, tax and fees). A good way to demonstrate this is with a comparison of returns if an investor is fully invested in shares versus missing out on the best (or worst) days. But without a proven asset allocation or stock picking process, trying to time the market is very difficult. In times of uncertainty its temping to try and time the market, ie to sell ahead of falls & buy in anticipation of gains. This note continues our updated series that began with “ Five great charts on investing”. But the basic principles of investing are simple and timeless and can be particularly useful to bear in mind in times like this. As the US economist JK Galbraith once said “there are two types of economists – those that don’t know and those that don’t know they don’t know.” And this is certainly an environment where much is unknown. I will be the first to admit that my crystal ball is even hazier than normal in times like the present. Successful investing can be really hard in times like the present when share markets are down sharply & very volatile on the back of uncertainty around inflation, rising interest rates and the war in Ukraine. ![]()
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