Timing the market is not a super idea

Published: 19 Mar 2020

When the market shows the volatility of the last few weeks, members start questioning whether they should do something like switch to cash or withdraw.

Others think they can time the market and attempt to take advantage of market volatility to make money. After all, some people make a living out of it, right?

According to Industry Super Australia, members who moved from an average balanced industry fund into cash after the Global Financial Crisis were $4,000 worse off after three months and $34,800 worse off after 5 years.

“People avoid selling their house during a market slump because they’re worried about making a loss [and] the same principle should be applied to changing your super fund or investment option immediately after a market drop,” ISA chief executive Bernie Dean said.

What is market timing?

Market timing is a tactic used by an investor who is trying to identify the best times to invest in the market and when to sell. These investors maintain that successfully forecasting the high and lows of the market can result in higher returns than other strategies, such as buying and holding. Others note that changes in the market can appear suddenly, irrationally or randomly, making the risk of mistiming these swings significant.

Investor and fund manager Peter Lynch once said: “Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they’re going to be higher or lower in two to three years, you might as well flip a coin to decide.

Studies also show that those who try to time the market actually underperform those who remain fully invested in the market.

There are a number of factors that make market timing almost impossible to predict:

  1. Markets act irrationally and therefore are not easy to predict. We have plenty of examples to demonstrate this. A simple 140-character tweet by Donald Trump can have the market plunging and COVID-19 has also shown how fear can impact markets. Something that legendary investor Warren Buffett wrote in 1987 that I think is particularly relevant right now: "We have no idea – and never have had – whether the market is going to go up, down, or sideways in the near or intermediate-term future."
  2. You cannot use the past price to calculate your buy, sell or switch. Markets future price, which means your switch of today will use the price at the close of business, which will be struck late tomorrow after all the market data is in.
  3. Knowing when the highest or lowest point is in a market cycle is hard to predict and choosing the wrong times will actually lose you money.
The risk of missing out
[1] Untouched$21,106$4,014$2,260
[2] Miss 10 top-performing months$9,487$1,706$1,041
[3] Miss 20 top-performing months$4,059$885$637

Source: Merrill Lynch, using the S&P500 as the “market”.

The above research shows two very significant points:

  1. The longer you’re in the market, the more significant your returns will be. The 3 columns show returns over 30, 20 and 10 years. While the 30-year period has seen more volatility due to time in the market, the returns still remain significantly higher.
  2. The rows in the above graph show that if you move in and out of the market and you mistime the market and end up not being in the market during 10 of the top performing months – or even worse you mistime the market and are out of the market during the top 20 performing months – you end up with less than if you stayed in the market and rode the volatile cycles.

Therefore, time IN the market is easier and provides a better chance of high performance than trying to time the market.

Here is a great tool that demonstrates the difficulty in timing the market, courtesy of UBS, click here.

So, what can you do in the current market?

Remaining steady with your investment options and not moving your money at a time when you could crystallise potential short term losses may be the best option, and there are some things you can control when looking at your super. The best place to start is your financial adviser, who can advise you on your options for your particular situation.

Here are a few simple ideas:

  1. If you’re drawing down a pension you can review the following:
    1. If you need money, then consider which investment option you’re drawing your money from. Our advisers often advise members to put some of their super in a lower risk investment option that has low volatility such as Cash. This means their drawdowns are not crystallising short term losses.
    2. If you don’t need your pension payments, you can consider halting payments for a period of time until the market settles. Just remember though, a minimum draw down requirement exists within a given financial year and that you will be required to draw this down prior to 30 June.
    3. If neither of the above applies, then you could consider switching just enough to cover your immediate cash requirements.
  2. If you’re still in contributing phase, you could consider contributing more. The power of super is compounding interest and time in the market. However, in instances where markets are low, investing more means you’ll receive a higher number of units, because of the lower prices. If you review your account, you can see your number of units remains unchanged, just the value of those units has moved with market sentiment. Therefore the lower prices will convert your investment into a higher number of units.

In summary time in the market beats timing the market. It means a long-term approach will deliver better results than chasing investment returns.

If you don’t have a financial adviser, it might be a good idea to speak with one of our financial advisers provided through ESI Financial Services*. Depending on your needs, this may be at no cost to you. To arrange an appointment for a phone consultation, contact us.

* ESI Financial Services Pty LTD (ABN 93 101 428 782) (AFSL 224952) is a wholly owned entity of LGIAsuper (ABN 23 053 121 564) (RSE R1000160). LGIAsuper Trustee (ABN 94 085 088 484) (AFSL 230511) (Trustee) as trustee for LGIAsuper (the Fund).

This article was prepared in March 2020 by Electricity Supply Industry Superannuation (Qld) Ltd (ABN 30 069 634 439) (AFSL 336567), the Trustee and Issuer of Energy Super (ABN 33 761 363 685), and may contain general financial advice which does not take into account your personal objectives, situations or needs. Before making a decision about Energy Super consider your financial requirements and read the Product Disclosure Statement, available at www.energysuper.com.au or by calling 1300 436 374.

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