Robin Bowerman, Head of Retail at Vanguard Investments Australia.
Robin Bowerman, Head of Retail at Vanguard Investments Australia.

High cost of market timing

THE powerful rebound in the sharemarket from the depths of the GFC provides a compelling lesson about the high cost of market timing.

Market timing – that is, trying to pick the best times to buy or sell shares – only succeeds on a few rare occasions if an investor is extremely lucky. And consistent success from market timing is virtually a mission impossible.

Veteran superannuation researcher Warren Chant, principal of Chant West, tracks the perils of market timing in an excellent newsletter this week headed Staying the Course Pays Off.

Chant answers a question that many investors would have been asking themselves over the past year or so: What would be the consequences if I had switched to an all-cash portfolio during the GFC?

“During the GFC, some [super fund] members despaired of seeing their account balances fall and switched out of growth options into cash,” he writes.

“While that decision was understandable at the time,” he adds, “it’s probably something they are regretting now because what they did was to lock in their losses and give themselves the added problem of when to get back into growth assets.”

Chant’s calculations for this newsletter are based on the median return of what he classifies as a superannuation “growth” fund with 61-80% of its portfolio in growth assets. (This is the default option for most members and, significantly, some other researchers classify it as a “balanced” fund.)

Chant West has produced a table showing that:

  • The only investors or fund members who benefited from switching to cash from a median growth fund had switched prior to October 2008 “before the full brunt” of the Lehman Brothers’ collapse was first felt. (It is assumed for the calculations that such a fund member is still invested in an all-cash portfolio.)
  • A fund member who switched to cash on October 31, 2008 from the median growth portfolio would have had a negative 16.2% return for the 28 months to February 28, 2010. (This takes into account the return from an all-cash portfolio after the switch. And again it is assumed that the member still has an all-cash portfolio.)

But fund members who stayed in the median growth fund throughout, their return for the same period would a negative 12.6%. This is much better than a negative 16.2%!

“The reality is that most of the people who did switch [to cash] left it too late,” Chant writes. “Not only did they bear the worst of the negative returns, they also missed out on the best of the positive returns when markets turned up.”

The most testing investment experiences typically provide invaluable lessons. This has been one.

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Robin Bowerman, Vanguard Investments Australia's Head of Retail, has more than two decades of experience in the finance industry as a writer, commentator and editor.



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