On The Dangers Of Market Timing

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Market Timing can be very dangerous to an investor in terms of losing out on potential returns. I have written many articles before on the cons of market timing.

Over and over again this concept has been proven wrong. For example in December 2018 US equity markets fell dramatically wiping out most of the gains of the year. Investors that sold out lost as stocks rebounded sharply since the start of this year and erased all the December losses.

Recently I came across an article by Matthew Young where he showed the dangers of market timing with a great chart. From the article:

The Dangers of Market Timing

The chart below highlights the dangers of market timing.

If a buy-and-hold investor put $1 in the S&P 500 at the end of January 1970, he would have $141 today. If that same investor tried to time the market but missed the best 10 months, he would have $44 today. If he missed the best 20 months, that $1 would be worth a mere $9 today. Market timing not only risks losing out on significant gains, but it also risks missing vital dividend payments.

 

Source: A Simple But Effective Strategy to Compound Wealth, Young Investments

The key takeaway for investors is that timing the market does not work and time in the market is more important for success in the long run.

The World’s 10 Most Valuable Brands 2018

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Brand Finance, the global brand valuation and strategy consultancy, published The World’s Most Valuable 500 Brands for 2018 earlier this year. Tech firms dominate the list with five spots going to companies this sector out of the top 10 as shown in the graphic below. The world’s most valuable brand is Amazon(AMZN) followed by Apple(AAPL), Google, a unit of Alphabet(GOOG) and Microsoft(MSFT). Social media giant Facebook(FB) came in at number seven.

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Source: Brand Finance

The Five Best and Worst Emerging Country Equity Returns 2003 Thru 2018

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Emerging equity markets are have higher risks but can yield higher returns. The following chart shows how diversification among these markets is essential for long-term success with this type of asset class. No one country is the consistent performer each year. For example, in 2018 Qatar was the best market while Turkey was the worst. Brazil was the best performer in 2009 and again in 2016.Despite almost daily hype about China in the media, the country’s equity index ranked the top emerging market all the way back in 2006.

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Note: The returns shown above are in British Pound Sterling and the returns are based on MSCI indices

Source: Lazard Asset Management

Asset Class Total Returns 2004 Thru 2018: Chart

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Diversification is a simple and easy strategy to beat market volatility. Diversifying one’s assets in a portfolio among various asset classes is one of type of diversification. The following chart shows the total return of various asset classes from 2004 thru 2018.

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Source: What Asset Diversification Looks Like, in One Chart, Northwestern Mutual

The chart shows in a colorful way that different asset classes perform differently in a given year.In 2009, for example emerging markets soared by over 78% in total returns only to return only 19% the following year. In 2011, they were the worst performer among the asset classes shown above with a loss of 18%.

Similarly commodities fell for four years in a row since 2013.

So the key takeaway is that it is unwise to hold most of one’s funds in a single asset type – whether it is gold, commodities, real estate, cash, etc. It is always better to own a bunch of different asset types to profit from the wide divergence in their returns year over year.