Don't time the market

I subscribe to Insights, a blog by Goodreid Investment Counsel. The following is a window into the quality advice in that newsletter. If I were looking for an investment advisor, the team lead by Gordon Reid would be among my top contenders. At times, I have found the advice in the Goodreid letter to be what I would call "wise and financially astute."

Myth: Timing the Market Results in Higher Returns

It is true that if you could consistently time the market such that you bought securities at their trough and sold them at their peak you would earn higher returns, so why is this a myth? To answer this question, we can look at several variables. 

To start let’s examine the length of the business cycle. If we can predict the length of the business cycle or better yet the length of each phase in the business cycle, then we will know when we are at the peak (and therefore should sell) and when we are at the trough (and therefore should buy). 

In the U.S. we can observe that the average length of the typical business cycle is 4.7 years, but varies greatly from cycle to cycle, with the standard deviation of the average cycle length being 2.2 years. (Marmer, 2016)  With most cycle durations deviating up to 47% away from the mean, it becomes very difficult to predict each cycle length with any real accuracy. 

To compound this problem the average stock market cycle in the U.S. is 7 years long with a standard deviation of 3.1 years. (Marmer, 2016) With both the business cycle and stock market cycle having differing, and highly variable durations it becomes nearly impossible to consistently predict how long each phase will last in order to sync up your trades to maximize profits. 

We can also observe the difficulties of market timing on a more granular level. During 2019 the TSX had a price return of 19.1%, which is a figure you may have seen discussed in the media as we entered the new year. What you might not know is that of the 251 trading days on the TSX in 2019, the 19 best days account for just over 94% of the annual return. Obviously, it would be next to impossible to predict which of the 19 days of the year would yield these returns. 

Instead of timing the market it's better to develop a disciplined strategy to be in the market that considers both your willingness and ability to take risk. We know that markets go up over the long run so don’t let your portfolio suffer by potentially missing the relatively few days (in this case 19) of the year that can drive your overall return.