Success driven by time in the market, not timing markets

02 October 2018 | Markets and economy


This article originally appeared in Fairfax media channels on 21 September 2018

Anniversaries are occasions when success can be celebrated and lessons reflected on when times were tough.

It is no surprise that the collapse of Lehman Brothers 10 years ago and the catalyst it provided for the Global Financial Crisis has prompted major amounts of public discussion and reflection.

And certainly there are lessons to be taken from such a major systemic event. It was life-defining for a generation of investors.

So as the Lehman anniversary ticks over there is a lot of attention on where we are 10 years after the collapse of one of the world's largest investment banks.

The good news is that investment markets have generated strong returns and investors have been rewarded for taking risk. The US sharemarket is up 361% since the bottom of the GFC in March 2009. The Australian sharemarket has delivered 201% and even the oft-maligned bond markets have produced returns of 84%.

Naturally some of the debate has been reflecting on what caused the GFC and whether market conditions today are showing signs of heading in an eerily similar direction.

Two of the most thoughtful pieces in recent weeks came from Christine Lagarde, the Managing Director of the International Monetary Fund, and The Economist magazine's leader article.

What made the collapse of Lehman Brothers significant – Lagarde pointedly asks whether if it had been Lehman Sisters if it would been the same outcome – was the broader run on the financial system. This led to 24 countries facing banking crises and while Australia escaped a recession technically, it was certainly not unscathed or immune from the global turmoil and pressure on the banking system.

Lagarde makes the telling point that while the pressure points leading up to the GFC seem obvious in hindsight – market share of sub-prime mortgages in the US reached 40% in 2006 – most economists failed to predict what was coming.

Both Lagarde and The Economist agree on one thing – the financial system is safer today but not all the lessons have been learned.

Some pundits are speculating that another major correction is close... some even advising people to keep their mobile phones on high volume in their golf bag in case the call comes that the market is collapsing.

Golf, it has been suggested, is a way to ruin a good walk. Trying to manage your investment portfolio on a phone during a market shock seems like a sure-fire way of ruining both.

Sadly what was missing from the commentary warning of the next market collapse was the phone number of the person calling to tell you another crash was coming. That is the fundamental flaw in the logic of trying to time markets because no-one rings you with that valuable piece of information.

A key challenge is to know when the market is actually turning as opposed to experiencing normal volatility.

What is the trigger? A 5% fall? 10%? More? Could a downturn in the market be just a dip and does the end of a bull market only become apparent when the damage to portfolios has already been done?

To illustrate the challenge, we simply examined how a strategy that attempts to time the markets would have compared to simply buying and holding over the long term – the last 26 years (01 July 1992 to 30 June 2018).

Starting with a $1000 portfolio of Australian equities in July 1992, the market timing strategy attempted to prove its worth by avoiding the worst of market falls – by selling into cash when the market was entering correction territory, at 10% of the previous peak – and getting back into the market after the worst of the damage was over – after the market had risen from the bottom by 10%.

The result after 6,783 trading days?

The market timer checking every day to see what the market is doing and whether to buy or sell has $7,127. The buy and hold investor ends up with $10,744, 50% more.

The buy and hold investor did not need to check the market – or add stress to their golf game – once.

That is not to say that investors should be complacent. Rather it is suggesting that the way to navigate significant market events is having an asset allocation across markets that matches your personal risk profile and long-term investment goals. And most importantly, the discipline to stick with it.


Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.
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Robin Bowerman, Head of Corporate Affairs at Vanguard Australia, shares investment and personal finance insights gained from over two decades in the finance industry as writer, commentator and editor.

Robin Bowerman