Time in the mar­ket, rather than tim­ing, is key to in­vestor re­turns

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE - Eoghain Mur­phy

IN­VEST­ING in mar­kets is an emo­tion­ally-un­com­fort­able ac­tiv­ity re­gard­less of mar­ket con­di­tions. Pe­ri­ods of high volatil­ity with mar­kets lurch­ing down­wards may be the most ob­vi­ous fear for most in­vestors, but the truth is that, in far more san­guine pe­ri­ods, it doesn’t get much eas­ier.

Over the sum­mer, the VIX (an in­dex mea­sur­ing im­plied mar­ket volatil­ity) reached its low­est point since 1993 and con­tin­ues to be at his­tor­i­cally low lev­els. At the same time, global eq­uity mar­kets have been achiev­ing new highs. Yet, be­ing in­vested or get­ting in­vested now may feel more un­com­fort­able than it has for a long time.

A key driver of this in­vestor dis­com­fort can be a cog­ni­tive bias known as the ‘gam­bler’s fal­lacy’ — where we be­lieve that be­cause an event has oc­curred more of­ten than nor­mal dur­ing a given pe­riod, it will hap­pen less fre­quently in the fu­ture. Thus con­tin­ued pe­ri­ods of growth and all-time highs can lead peo­ple to be­lieve the bal­ance must be about to swing the other way.

How­ever, look­ing his­tor­i­cally at the dis­crete monthly per­for­mance of global eq­uity mar­kets, sus­tained pe­ri­ods of pos­i­tive re­turns can last longer and oc­cur more of­ten than pe­ri­ods of neg­a­tive re­turns. His­tor­i­cally, the prob­a­bil­ity of a sin­gle month pro­vid­ing a pos­i­tive re­turn is 62pc, and hav­ing ex­pe­ri­enced that first month of gains, the chance of see­ing a sub­se­quent monthly gain ac­tu­ally in­creases to 64pc. Af­ter two con­sec­u­tive months of pos­i­tive re­turns, the chance of a sub­se­quent monthly gain in­creases fur­ther to 65pc.

Past per­for­mance does not pre­dict fu­ture re­turns: how­ever it is a pow­er­ful in­sight into pos­si­ble (if not prob­a­ble) mar­ket be­hav­iour and helps to shine light on the some­what in­cor­rect no­tion that neg­a­tive per­for­mance be­comes more likely the longer an up­ward trend con­tin­ues. His­tory also shows us that the longer our hold­ing pe­riod, the more likely we are to see pos­i­tive per­for­mance. This should give us some com­fort that there is a prece­dent for longer-term pos­i­tive trends in the mar­ket and our focus as in­vestors should be to step back and an­chor our judg­ments over the longer term in or­der to nav­i­gate the choppy wa­ters of the short-term.

There will al­ways be con­tin­u­ing con­cerns that seem salient to the econ­omy (such as geopo­lit­i­cal events and cli­mate-re­lated dis­as­ters) which add to in­vestor un­easi­ness. It is im­por­tant to prac­tise some con­sid­ered thought here, rather than sim­ply view bad news from one area, say pol­i­tics, and as­sume neg­a­tive news will also af­fect an­other area, such as the econ­omy.

If mar­kets are close to the precipice, need­less to say it will not be ‘the best’ time to in­vest, and it may be some time be­fore mar­kets re­turn to pre­vi­ous highs. Ex­pe­ri­ence tells us that it is bet­ter to be in­vested than at­tempt­ing to time the mar­ket per­fectly. Wait­ing for the right mo­ment re­lies on hav­ing large stores of com­po­sure to over­come the emo­tional dif­fi­cul­ties of in­vest­ing when mar­kets have been fall­ing, but also the ex­pec­ta­tion that the ‘right’ time is just around the cor­ner. You could also miss out on the re­wards that long-term in­vestors can com­mand for pro­vid­ing cap­i­tal to be put to pro­duc­tive use.

While more treach­er­ous times will un­de­ni­ably re­turn to mar­kets in the fu­ture, long-term in­vestors should take so­lace from his­tory as it teaches us that it is time in­vested in the mar­ket, not the tim­ing of the in­vest­ment, which is most im­por­tant for long-term re­turns. Eoghain Mur­phy is a direc­tor at the wealth and in­vest­ment man­age­ment di­vi­sion of Bar­clays Any in­vest­ment com­men­tary in this col­umn is from the au­thor di­rectly and should not be seen as a rec­om­men­da­tion from

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