Market-Timing: Should We Try To Beat The Financial Markets?

by Travis Blau

 

 

The essential

  • In the medium to long term, investments suffer from market-timing
  • More than 90% of managers do not beat the markets
  • It is important to invest early and regularly to optimize risk management
  • A steady, long-term investment multiplies your gains

Sector studies, price comparisons, estimates of volumes processed, macroeconomic or technical data are analyzed daily by financiers to estimate the appropriate time to buy or sell such assets.

According to historical data, market-timing expectations that aim to invest and sell in a timely manner in order to maximize returns and therefore predict its direction through these indicators are almost impossible to apply, while long-term performance term are strongly influenced by only a few daily performances.

 

The difficulties of market-timing

 

The difficulties of market-timing

 

Since its inception in 1998, the annualized performance of the MSCI World Index (a proxy for equity market behavior around the world) has been 5.1%. By missing only the 5 best sessions on almost 20 years (from 31/12/1998 to 01/03/2018: 5,000 trading days), the average annualized performance would have fallen to 3.94% per year!

Worse, by missing the 50 best sessions on the same period, the performance would have even been negative and equal to -4.41% per year or a total loss of 58% over the period!

In addition, 6 of the 10 best Sessions of the MSCI World are within 3 weeks around 8 of the 10 worst trading sessions!

This theory also holds true with many other indices such as the Stoxx Europe 600 (European equities), the MSCI Emerging Market (emerging country equities), the S & P500 (US equities) and many others! And the results are surprising:

 

Example for a capital of € 100,000 invested on the first day of listing the index

Professional managers do not beat the markets

 

Professional managers do not beat the markets

The data of the study

According to a SPIVA * study, conducted more than 15 years ago, which monitors more than 10,000 funds, more than 90% of market-timing managers do not beat the markets over 10 years.

This SPIVA study states that foreign exposure funds underperform their benchmarks more broadly. The size of the funds also seems to be an important parameter because globally the largest funds perform better than the smaller ones.

Finally, the study adds that fees have a significant impact on returns.

The latest analysis of the Spiva study on US markets, published on March 15, 2018, tells us that despite the good performance of the end of the year on the stock market with a gain of 21.83% for the S & P 500 on the year, 52% of managers investing in large, mid-sized and small-cap stocks do not beat the benchmarks in 2017.

Worse, over 5 years and 15 years they are respectively 87% and 94% of them who fail to beat the indices.

These figures largely support the assumption that it is particularly difficult, if not impossible, to achieve long-term and repeated market expectations.

The market: the result of managers, fees, and luck …

The market is the result of the behavior of all the managers to which we can add the costs and a certain luck factor.

Indeed, imagine leaving 10 managers in a room and ask them to exchange: knowing that prices are set by the balance between supply and demand, half of the managers will be below the average price which represents a subscript, and the other half will be above.

Add now the fees applied by each of the managers and which impact your performance logically, that is when more than half of them are below our benchmark.

Repeat the process several times and it will almost never be the same that will be above the index, so it is partly a question of luck for those who are …

Time in the market rather than market-timing

Time in the market rather than market-timing

Risk management

Therefore, in terms of risk management, it is better to forget the market-timing .

It therefore seems wiser to allocate investments over time and to invest the available liquidity now and then regularly and systematically, whether the markets are up or down, which makes it possible to obtain a price. means of reasonable entry while ensuring optimal risk management.

Cumulative interest

In addition, investing over 10 years with a return of 5% is much more interesting than investing over one year for a yield of 5% because the compound interest of your investment will finally win you 62% over 10 years!

Reduced fees -> ETF

Rather than wasting time, energy, and money, it is important to invest at the level of the accepted risk in relation to profiles and projects, and to choose financial supports that are cost-effective. : especially ETFs, in order to optimize your returns.

An ETF (Exchange Traded Funds) or tracker is an investment fund, ie a basket of stocks and / or bonds, which replicates the price of an index (such as the CAC40). Trackers have the advantage of being inexpensive. Indeed, the automatic replication of an index involves only a few human resources, so that their costs are up to 10 times lower than those of traditional funds.

The cost of ETFs is on average 0.25% against 2% for a traditional fund which can have a considerable impact on your return.

According to Morningstar, assets under passive management in Europe increased by 25% in 2017 and more than doubled over the last four years.

To learn more about ETFs, we invite you to read our article: What is an ETF (or index fund)?

Conclusion

In summary, it is therefore a well-thought-out allocation based on your objectives and your investment horizon that will bring a real added value to the latter, rather than a risky and ineffective attempt to anticipate a market whose result is more of luck than analysis and experience.

What Nalo does for you

 

Nalo is a specialist financial investment company that offers a 100% ETF life insurance policy under mandate. You benefit from all the benefits of life insurance associated with those of trackers.

We recommend a tailor-made portfolio and adapt your allocation to your financial objectives and your heritage environment. Your benefits are regularly adjusted according to economic and financial conditions and we gradually secure your investments according to your investment horizons.

In addition, ETFs make it possible to invest in several hundred companies and are managed automatically. Rather than trying in vain to beat the market by selecting companies using a risky method, these funds replicate a stock market index at lower cost. Fees being lower, the performance returned to our customers is only better.

 

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