One of the topics I have written before many times is about investors trying to time the market.You can some of find those articles here and here and here and here. This strategy is never a good idea and always leads to investors losing out on returns. Investing in equity markets involves the risk of losing money due to a variety of factors outside of an investors’ control such as a stock becoming worthless when a company files for bankruptcy. However there is another risk that is even worse.And that is investors’ reacting to their own emotions. For example, when markets are in correction mode, some investors get scared and sell out their holdings fearing further losses. Such investors hope to get back into the market after further declines and usually try to identify the bottom and buy back their stocks in order to amplify their returns. However the chances of executing such a maneuver for any human is almost zero. This is because it is not easy to spot the bottom and also there are not many people who will be brave enough to buy when the whole market is crashing day after day. So the idea of timing the market fails every time.

Stephanie Flanders of JPMorgan Asset Management, UK talked about the danger of timing the market in a recent article. From the article:

Don’t try to time the market

We’re all human, so when the market slumps, it’s easy to make decisions based on emotion, rather than fact. But returns on the S&P 500 index from the last 20 years show that six of the 10 best days in the stock market occurred within two weeks of the worst 10 days.

If you sold US stocks after the market took a tumble in October 2014 your return for the year would have been just 2.4 per cent. If you stayed in until the market dipped again in mid-December, your return was a much healthier 8.85 per cent.

But the last two weeks of 2014 were among the strongest of all for the US market. The annual return for investors who stuck it out to 31 December was nearly 14 per cent.

Source: Four themes and three rules that matter most for Isa season, Mar 5, 2015, Money Observer

We can also see the problems with timing the market using the example of the DAX, the German benchmark index. The DAX plunged to as low as 8,354 last October. This month it reached a record high of 11,600 and closed at 11,550 on Friday. This year alone the index is up more than 15%. So anyone who panicked in October and sold out their German holdings missed the huge rally since then. It is unlikely that those that sold in October got back in time to catch the upside move. In September 2011 the DAX index was under 5,000. From that level it has more than doubled now. It went down as low as 3,588 during the global financial crisis in 2009.

Timing the market also adversely impacts the lost returns due to the effects of dividend reinvestments. For instance, when one sells out their stocks, they lose out on the dividends that they would have received and if they reinvest those dividends the also lose out again on the opportunity to pick up additional shares cheap when prices are low.

So instead of trying to time the equity markets investors should have a long-term horizon and buy-and-hold high quality stocks. This strategy will not only lead to higher returns but also one can go to sleep peacefully at without the stress and worry about day to day market movements.

Some of the companies that investors can consider for long-term investment are: Unilever NV (UN), Nestle SA (NSRGY), Safran SA (SAFRY), DBS Group Holdings Ltd (DBSDY), Diageo PLC (DEO), Westpac Banking Corp (WBK), Nordea Bank AB (NRBAY), Colgate-Palmolive Co (CL), British American Tobacco PLC(BTI), etc.

Disclosure: No Positions

In 2014, the U.S. equity markets had an excellent year with the S&P 500 rising 13.69% including dividends. This year the performance of the index has been average so far. Since the lows attained during the Global Financial Crisis in 2009 the S&P 500 has shot up and has more than doubled. From 2009 thru 2014 except in 2011, the annual total return of the index every year was in double digits.  With such great returns year after year investors may be tempted to believe that stocks generally yield 10% or more every year. However that is not true. Equities are unlikely to generate such high returns every year if the past is any indication.

From an article by Niels Jensen of Absolute Return Partners:

Academics operate with an expression called recency. It basically means that we, as humans, assign greater relevance and importance to more recent events than we do to more distant ones. When equities delivered exorbitant returns during the great bull market of 1982-2000, it became the norm to expect double digit returns from equities, despite the fact that equities had rarely delivered such high returns before the 1980s (chart 1).

Click to enlarge

The combination of high debt and deteriorating demographics will almost certainly lead to below average economic growth over the next 5-10 years, and with comparatively low economic growth, low earnings growth will follow. Any other expectation is entirely unrealistic. Now is not the time to be expecting double digit equity returns.

Obviously, rising P/E multiples could still result in decent equity returns, and modestly rising multiples are precisely what I need for the equity market to generate mid-single digit annual returns over the next several years. (For the record, that expectation is driven primarily by the very low interest rates environment.) I just don’t think the multiple expansion is going to be massive, given the very strong headwinds I mentioned earlier.

Source:  Tigers in Africa, March 2015, The Absolute Return Letter, Absolute Return Partners

So it is important to remember that returns from equities will be muted moving forward and based on past data and investors have to adjust their expectations accordingly.Double digit returns every year is unlikely.

Related ETF:

• SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

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From an article on this topic from The Wall Street Journal:

In early January, financial adviser Winnie Sun sat down in her Irvine, Calif., office with a prospective client whose net worth topped $350 million. As they talked, the client told Ms. Sun he expected to make 20% a year in the stock market.

Ms. Sun was taken aback. That is twice the average annual return of the S&P 500 since 1925, once dividends are included.

“I said, ‘I think the main thing you need to realize is that in the past there were extraordinary times when we had great returns but to expect that in the next few years is impractical and somewhat delusional,’ though I didn’t say delusional,” said Ms. Sun, a founder of Sun Group Wealth Partners, with $160 million of assets under management.

The investor, who was in his late 20s and newly wealthy, left the meeting quietly. He reached out to Ms. Sun a week later to tell her he appreciated her frank response but hasn’t put money with the firm.

Investors have reason to expect a lot from stocks. On average, the S&P 500 has returned 18% a year since 2009, including dividends, and from the start of 2012 the index’s total return has averaged 21% a year. That is the S&P 500’s best three-year period since the tech bubble era of 1997 through 1999. Total returns reflect price changes and dividends.

Advisers like Ms. Sun, said that as the bull market rolls into its sixth year, there has been a shift from the dour outlook that followed the financial crisis, in which they often had to cajole clients to keep their money in stocks.

Some advisers said they now have the opposite problem: They have to counter expectations for stock-market returns that are well above long-term averages and fend off demands that advisers put more money into U.S. stocks than the advisers feel is appropriate.

Source: As Bulls Romp, Advisers Aim to Manage Down Expectations, Mar 9, 2015, WSJ