As retail investors we can often slip into trying to time the market in the short term, to get into and out of the investment at the perfect time. However, is there really such a thing in the markets as ‘perfect timing’? No one can predict the exact peaks and turns of the market. The question remains, what difference can a few days in a long-term investment truly make? The truth is that in the short-term no investor’s journey will generate exactly the same returns unless they entered the investment at exactly the same time and submitted identical transactions going forward.
Taking a look at a daily return graph from a year perspective for the JSE All Share, The Fairtree Equity Prescient Fund, and the Fairtree Worldwide Flexible Fund to illustrate. Every bar represents an investor’s investment looking back one year from that date and provides a return. As shown in the illustration, no investor has the same experience, even if they entered in the same month but on a different day. The investor which entered the JSE All Share on the 5th of March 2020 would feel a bit left out as they sat at a 32.6% return in the market one year later on the 5th March of 2021. In comparison to their friend who entered only 7 days later, on the 12th March 2020, generating a one-year return of 58.15% by 12th March 2021. A further 7 days later on the 19th of March 2020, another friend entered, and a year later by 19th March 2021 their return was sitting on at 73.9%. Lastly, on the 7th of April 2020, another friend joined investing into the JSE and on 7th April 2021, their investment return was 45.28%.
If an investor was trying to time the best day to enter into one of these three investments, how would they have known the answer? Especially without knowing what the next day would truly hold.
Looking back, it always seems so clear to just buy at the dip because the market will turn to recover afterward. However, in hindsight, it is always clear what to do and what not to do. While the event is live how can an investor know; has the dip truly bottomed out, or is there more coming, and how long will markets take to recover? If I pay my money in today will I be invested today? Is my FICA sorted and accepted? There are so many variables that determine the exact entry point into the market for the retail investor. Thankfully, over time these specific questions tend to disappear as the power of cumulative performance works its magic. Yet many investors get caught in the short-term analytics.
We have had a look at daily returns one year looking backward and found the return journeys to be quite different from investor to investor. Now we will examine three additional graphs which will hopefully further dissect this illustration. Here we will be looking at the 1-year, 3-year, and 5-year returns of the underlying strategies which we use when managing the Fairtree Worldwide Flexible Prescient Fund, together with the JSE All Share and Fairtree Equity Prescient Fund. Across all three graph comparisons 1-year, 3-year, and 5-year, we will be comparing different investors’ journeys. This includes one investor who joined in January, another who joined in February, another in March, and the last in April.
In this first graph comparing the investors’ journeys of 1-year performance, it varies quite a lot. The investor who joined in January 2020 experienced a very different return story to that of the client joining in March 2020. Again, similar to the daily returns journey in our first graph it might appear that timing the market really does matter.
However, these are all long-term investment strategies with substantial holdings in high-risk assets, like equities and property. This means that to get the maximum growth benefit of the investment structure, an investor would need to hold onto the investment for the correct time horizon of the strategy. In this case that is anywhere closer to 5 years or more.
Let us see what happens when we look at a 3-year performance comparison. You will see how the investors’ journey’s start to become more and more similar over time:
Interestingly we can see that the longer we stay invested, the less the difference between our return journeys become. Here, the investor who joined in January 2018 still experienced a different return story to that of the client joining in March 2018. However, it is starting to converge to a similar story, still bearing in mind that obtaining the optimum growth from this portfolio would be investing for 5 or more years. Let us take a look at what the 5-year return comparisons showed:
Here we see that the return journeys over the 5-years differ very slightly between the investors joining one month apart in January 2016, February 2016, March 2016, and April 2016. Even more interesting would be drawing our attention to what happened over March. In the short-term (1-year and 3-year) March seemed to be outperforming the other months. However, fast-forwarding 5 years they would have ended up with a slightly lesser return journey. Why?… Because you cannot time the market. Anything could have happened between 28 February 2021 to 31 March 2021 that would have influenced the difference.
To conclude, through these visuals we have tried to help investors see that timing the market and bargaining on buying the dip, is almost impossible. In the moment, no one could have guessed the lowest point during March 2020 especially through the smoke of our emotions and fear, prohibiting us to see clearly. Anyone could have come out of March 2020 looking like a rockstar or just an average Joe. Regardless of the exact point of entry, staying invested for the long-term (in this case it is a 5 plus year stated investment horizon) guarantees a successful outcome.
This will save investors from the short-term stress of trying to time the market. By distinguishing between what they can and cannot control. What we cannot control is the volatility of the market, what we can control is our behaviour toward it.
“Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behaviour is hard to teach, even to really smart people.” – Morgan Housel
– Wessel Grobler & Kheara Lugg
Morgan Housel, from “The Psychology of Money:Timeless Lessons on Wealth, Greed, and Happiness”