Time in the market, or timing the market?

Nobody knows anything

Although we like to weave convenient narratives to explain history, the belief that life is linear and predictable can be a dangerous fallacy.

In real time, the world is random and unpredictable, and heavily impacted by rare and totally unpredictable outlier outcomes, known as ‘Black Swan’ events.

The dirty little secret of economics is that forecasters can’t predict the future reliably, and certainly not complex and volatile markets.

Economists confidently expected the Aussie stock market to finish 2008 at around 6,500, for example, but instead it ended the year closer 3,500.

When expert predictions can be as wildly inaccurate as this, it may be wise to treat forecasts are mere entertainment rather than something to build a strategy around!

Asymmetrical bets

An investment strategy is effectively a series of bets.

Given the world is unpredictable and prone to randomness, investors should consider seeking bets with more upside than downside.

It’s also wise to avoid investment strategies which are akin to picking up nickels in front of steamrollers.

In business, investment, and life, we should remain paranoid about negative Black Swans; but we should also actively seek exposure to positive Black Swans.

From an investment perspective, when there’s limited downside you can afford to be somewhat more aggressive.

Dollar cost averaging

A popular alternative approach to timing the market (buying low and selling high) is known as dollar cost averaging (‘DCA’), whereby a set dollar amount is invested in the market each month or quarter regardless of market conditions or price.

This buy and hold strategy is based on the assumption that markets will move higher over time, which history suggests is probably true (though sometimes there will inevitably be long periods with no real returns).

The most important thing to note about such a strategy is that you mustn’t abandon it when the outlook starts getting hairy!

Following the Wall Street Crash of 1929 the Dow Jones index fell by 89% from peak to trough, while a notional portfolio of $500,000 dropped to $75,000 in a single year (1930).

The market did recover its lost ground eventually, but it took until 1954 to do so.

Long periods of nil or negative real returns have also been a characteristic of Aussie stock markets, even inclusive of dividends:

Source: Philo Capital

This doesn’t mean that DCA can’t work, but it does show that when market valuations become expensive a long period of zero or negative real returns is quite possible (if not likely).

Volatility does not equal risk

Our ‘buy low sell high’ approach is relatively agnostic to forecasts, predictions, or the economy, and we don’t worry unduly about unforeseen events or market crashes.

In fact, we positively benefit from such volatility because market crashes throw up great buying opportunities.

Back to the question in the blog post title: time in the market, or timing the market?

The answer is that it depends on the phase of the market cycle that we’re in.

When your favourite markets are cheap (2009-), time in the market tends to work just great.

When valuations are high (2020-) then it makes sense to cast the net further afield to look for opportunities to buy low.

Of course, it’s true that it’s impossible to time markets perfectly, but that’s not the point, and, importantly, nor is it necessary.

The good news is that it’s a big world out there, and it’s more than possible to identify cheaper markets to invest in.

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