Market Volatility and Investment Timing
Updated: Mar 6
Ideally, wouldn’t we all love a crystal ball that could tell us when to buy low and sell high? However, as famed mutual fund manager, Peter Lynch said, “People spend all this time trying to figure out ‘What time of the year should I make an investment? When should I invest?’ And it’s such a waste of time. It’s so futile.’” But why would the wildly successful portfolio manager say such a thing?
Peter did a fascinating analysis covering a 30-year period of time from 1965 to 1995, a period with plenty of highs and lows in the stock market, good times and bad times. He took three imaginary investors who each invested $1,000 per year in the stock market and had a buy and hold strategy. Investor 1 was unlucky in his market timing and bought stocks on the most expensive day of the year. Investor 2, who had great luck in her timing bought stocks on the least expensive day of each year. Investor 3 always bought her stocks on January 1 each year. The average rate of returns for each of the investors is quite surprising. Unlucky Investor 1 made 10.6% annually. Lucky Investor 2 made 11.7% annually. Finally, the punctual Investor 3 made 11% annually. You can see that perfect timing each year was only worth an extra 1.1% more than worst timing each year over the 30-year period.
What can we learn from this interesting analysis?
1. The difference between perfect market timing and worst market timing over a long period of time is surprisingly small.
2. The investors did nothing fancy in their investing as far as trying to time the market well or outperform the market in any way.
3. The investors were all consistent in their investing letting time work the magic of compounding.
4. Like all stock fund investors, they were compensated in the long term for assuming the risk of market uncertainty and volatility in the short term.
5. And finally, the single best thing the investors did – or should I say did not do – is they did not freak out in the down markets and sell, but rather let their investments grow and compound over time.
For further reading on this topic, check out a short and easy read on Schwab’s research about market timing which is even more extensive than the analysis by Peter Lynch at https://www.schwab.com/resource-center/insights/content/does-market-timing-work
In conclusion, I hope you remember that consistent investing and staying the course over time are powerful wealth builders, and don’t let the market downturns put you in a panic sell mode.