Is It Important To Time The Market?

For a long term type of investor such as Warren Buffett, timing the market does not appear to hold much degree of significance. After all, this type of investor believes that an undervalued company (coupled with solid fundamentals, management, etc) will find its feet ultimately and investors will "recognize" its value one day. This group of investors are generally seen as the minority group, as most of the others generally prefer to go for short-term or medium-term type of investment. For this majority, they will most likely argue that timing the market is of utmost significance. After all, catching a falling knife is likely to hurt one, badly!

So, who is right, who is wrong?

Most long term investors will argue that volatility in equity prices is an inherent part of investing. It takes courage, discipline and foresight to remain invested in the market, especially when the urge to avoid financial pain is strong. Investors may be prone to sell in a volatile market because they think they can wait until the market settles lower and go back in when the market starts to recover. This strategy seems to make common sense". However, the problem with this strategy is that they may miss their chances of missing the major market movements that signal the start of a longer recovery. Many of these major upside moves can happen quickly, often in just a few days.

Interestingly, a study conducted by a local asset management group on Malaysia's equity market (KLCI) has the following analysis.

• Missing five of the best trading days results in negative returns of 17.39%.
• Missing the 10 best trading days and the loss almost triples to 49.13%.
• Missing the 30 best trading days and the loss soars to 83.07%. This represents just 30 days out of approximately 3,807 trading days in total, or merely 0.79% of the total trading days
• An investor who remained invested throughout the last 15 years enjoyed returns of 82.25 per cent.

Nevertheless, how about if we assume an investor manages to avoid the worst trading days? The results of the study reveals the following:

• Remaining invested through- out the last 15 years gives returns of 82.25 %.
• Avoiding just the five worst trading days results in positive returns of 260.15%.
• Avoid the 10 worst trading days and the gain jumps to 413.62%.
• Avoid the 50 worst trading days and the returns are a phenomenal 3,266.59 %.

The results are far better than than the first scenario. However, the most fundamental question is whether the investor is able to have the foresight and timing to perfection to avoid those worst trading days? Quite likely, the answer is No, likewise no one is able to aim buying at the cheapest price!

Does this mean that investors should never attempt to time the market at all and buy at whatever time, even if the market is expected to sink further?

Certainly not.

In my view, first and foremost, we need to understand that timing the market does not equate to trying to mark an entry at the best possible pricing. It just means a way to minimize one's risk or what we call risk management. The best way of gauging the timing of the entry is by using tools such as technical analysis, i.e., enter the market only when there is an appropriate buying signal. Sceptics will argue that technical analysis is no crystal ball. It may be true somewhat but the key here is risk management. By using technical analysis, one can reduce the risk of getting it wrong. Why invest when the market has shown little sign of recovery or a sustainable recovery? Catching a falling knife can hurt the most! The current global crisis is the best case of example. Cheap stock prices and undervalued companies are aplenty, but when sentiment is against you, no fundamental holds as fear factor will over power any positive mindset!

In addition, it may also take years before the market recovers. For instance, the Dot Com burst in Year 2001 took around 2 to 3 years for full market recovery.

While it may appear sensible for investors with plenty of cash to just ignore the timing, buy and then put aside without ever looking at if for several years, many investors are simply not in the same league financially. The fact is many investors also do not possess the right emotional state to handle large amount of paper losses.

As such, the "safest" route for many, is still timing.

"Its not about being right or wrong, rather, its about how much money you make when you're right and how much you don't lose when you're wrong" - Quote by George Soros

However, for those who are not active investors, perhaps leaving it to the professionals may be the better option. However, be prepared to see your investment values erode as market will most likely not recover so soon.

For more details on the study, please click this link.