Many ASX shares investors have quietly wondered whether they're good enough to time the market.
Perhaps you've tried to identify the market signals that will tell you of an impending rise or fall.
Perhaps you've lamented not moving some of your superannuation into cash after a big market run.
Or maybe you've bought certain ASX shares because you felt confident of a short-term gain.
It sounds great, but is it really possible to time the market?
Can you ever perfectly time the trading of ASX shares?
AMP Ltd (ASX: AMP) chief economist and head of investment strategy, Dr Shane Oliver, says timing the market can look easy in hindsight but is incredibly hard in the moment.
In a recent blog, Dr Oliver commented:
With the benefit of hindsight many swings in markets like the tech boom and bust, the GFC and the plunge and rebound in shares around the COVID pandemic look inevitable and hence forecastable and so it's natural to think "why not give it a go?" by switching between cash and shares within your super to anticipate market moves.
Fair enough. But without a tried and tested market timing process, trying to time the market is difficult.
Why is timing the market hard?
One of the biggest problems with jumping in and out of ASX shares is that while you may miss the worst days of the market fall (advantageous), you may also miss the best days of the rebound (not so good).
The best and worst days often occur very close together, so your timing has to be pretty impeccable.
Dr Oliver compared the returns of an investor who stays fully invested in ASX shares vs. one who jumps in and out of the market and thereby misses the worst days but reinvests in time to catch the best days.
(By the way, if you ever manage to do this, you should buy yourself a lottery ticket immediately!)
Say you were invested in ASX shares from January 1995 and held your investments through thick and thin. In that case, Dr Oliver says your returns to date would have been 9.5% per annum (including dividends but excluding franking credits, tax and fees).
If you tried to time the market and actually managed to nail it by missing the worst days and reinvesting in time for the best days, here's what would happen.
Say you sold your ASX shares and avoided the 10 worst days in the market since January 1995, then you would have received a superior return of 12.2% per annum.
If you were some kind of wizard and sold your ASX shares in time to avoid the 40 worst days, your returns would have been turbocharged to 17% per annum.
Sounds great, but the reality is this is incredibly hard to achieve, according to Dr Oliver.
He comments:
…. many investors only get out after the bad returns have occurred, just in time to miss some of the best days. For example, if by trying to time the market you miss the 10 best days, the return falls to 7.5% pa. If you miss the 40 best days, it drops to just 3.5% pa.
Another viewpoint on timing the market
Dr Oliver also compared the cumulative return of two portfolios.
The first is a fixed balanced portfolio of 70% ASX shares, 25% bonds, and 5% cash. The owner stays invested no matter what the market does.
The second portfolio has the same composition, but the owner moves 100% of their money into cash after a negative calendar year and doesn't reinvest until after a positive calendar year has occurred.
Dr Oliver explains the results:
Over the long run the switching portfolio produces an average return of 8.6% pa versus 10% pa for the balanced mix. From a $100 investment in 1928 the switching portfolio would have grown to $279,236, but the constant mix would have ended more than 3 times bigger at $931,940.
Dr Oliver said switching out of ASX shares and into cash after a bad patch can just lock in losses.
He concluded:
The best approach is to recognise that super and shares are long-term investments and adopt a long-term strategy to suit your circumstances – in terms of your age, income, wealth and risk tolerance.
S&P/ASX 200 Index (ASX: XJO) shares are in the red on Tuesday, down 0.17% to 8,070.4 points.
