What you gain from perfectly timing the stock market (it's not as much as you think)

Dean Anderson is the chief executive of Kernel Wealth.

OPINION: The first half of 2022 was a painful experience for many investors, in fact, it was the worst January-to-June total return for the S&P 500 in 50 years.

To highlight the point, data from research house Morningstar shows only 5.7% of the 821 funds covered in New Zealand have provided a positive return during the six months to June 30.

What does this tell us about the rest of the year? Should you be avoiding markets and expecting the trend to continue? Should you be buying these dips and taking advantage of this opportunity?

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You will always find someone who thinks the market is too hot or cold or risky right now, and short-term market prices are ultimately driven by investor sentiment. So we thought we would demonstrate how to perfectly time the market.

Imagine on New Year’s Eve 2000 you made the resolution to save for your future by putting aside $100 per week. By June 30, 2022, you would have saved $110,400, itself a great result and a reflection of how small and consistent behaviours can make a big impact.

However, rather than just leaving your savings sitting idle, what if you opted to invest in an index fund, and could you have done better by timing the market?

Every investor wants to avoid losses and market downturns. So what if you held your money in a savings account until it was the perfect time to invest? After all, in hindsight there were seven periods of greater than 10% “correction” between 2001 and today, shown below between the red and green dots.

If you got it absolutely right and invested at the exact low point of the market (each green dot), your investment would be $333,605 today. This meant investing all your saved-up cash on September 17, 2001, being less than a week after 9/11, and then again on five “ideal” days, including the days New Zealand went into lockdown due to the Covid pandemic.

It can’t be overstated how hard it is to predict the bottom of a market and the perfect hindsight required.

By contrast, what if you got it spectacularly wrong and invested your saved balance on every red-dot day? Investing on the seven market peaks only for a significant fall to begin the following day, your investment would today be worth $243,729. Not as good, but 54% more than the $158,332 you would have from your savings account alone, if you received the 90-day bank bills rate.

But what if you just invested regularly without any thought to timing, choosing an automatic approach? On the very first day you started putting your savings to work by automatically investing each week into an index fund. Then you rarely looked at your account again.

Whether you knew it or not – and hindsight is wonderful – you consistently invested whether it turned out to be a market peak or market bottom. Today, your balance would be $309,488, only 7.7% off the theoretical perfect timing over 21 years – which remember, involved investing perfectly on just seven days across the entire period, a statistical improbability.

How is that possible? While many people try to convince you they can predict the future, as the adage goes, “it’s time in the market, not timing the market” that gives the best practical results. This has been proven numerous times across multiple markets and time periods.

For those looking to build their long-term wealth, regular investing and owning the market is a strategy that Warren Buffett regularly touts. At his latest annual shareholder meeting, Buffett recommended against obsessing over finding a perfect time to buy a stock.

“We haven’t the faintest idea what the stock market is gonna do when it opens on Monday – we never have,” Buffett said. “I don’t think we’ve ever made a decision where either one of us has either said or been thinking: ‘We should buy or sell based on what the market is going to do, or for that matter, what the economy is going to do.’”

If you’re worried the market is too risky, too high or the future is too uncertain, instead think about the things you can control. Why am I investing? When do I need to use this money? Then set up an investment plan that works for you – because your goals can’t wait, but emotive headlines can.

The methodology and assumptions: All returns are exclusive of tax. As PIE tax and withholding tax on interest earnt depend on personal factors, it would be confusing to include and unlikely to change the outcome. We have used the NZX50 gross index daily price series, where all dividends were reinvested on ex-date, exclusive of fees. Fees would have a negligible impact on the relative outcome of the different strategies. Savings were made every Thursday for weeks in a row with investments made at market close. The 90 day bank bill rate was used for illustrative purposes, in reality cash savings account rates vary periodically. Past performance is no indicator of future performance for any investment. This article does not constitute financial advice, as your personal circumstances have not been taken into account.

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