Sense and nonsense of market timing

We examined the effect of entering and exiting the market, or in other words, of timing the market. In doing so, we looked at the result of the 10 best and the 10 worst trading days per year over the past 20 years. We compared this with the investment result of our active investment strategy in profile 4.

Active investors who try to time the market determine their investment position from day to day by anticipating price movements that may occur in following days. With such an approach successes can be achieved in the short term, but there is also a high likelihood that the investor as such misses days of price rises and is invested on days of price falls.

Looking at risk profile 4, we see that the average return of this risk profile from 1 January 2004 to 31 December 2024 at ABN AMRO is 6.15% per annum.

This return could be achieved if the investor followed the active investment strategy of the ABN AMRO Investment Committee and which our experts implement in the stock selection. We see that if EUR 100 was invested at the start of 2004, it would be worth around EUR 370 by the end of 2024.

Suppose an investor would not have been invested during the aforementioned period only during the worst ten days of each year. Then the average return would rise to 18.5% per annum. The EUR 100 invested would then have grown to a whopping EUR 4,111.

The strong increase in returns highlights the impact of just ten days a year. But what would happen if we missed the ten best days every year by not being invested precisely then? The result: a big dent in annual returns. Because without these ten best days, the average return shrivels to -3.7% a year. In other words, missing those days would have even resulted in a loss. The same EUR 100 invested would then have been worth only about EUR 44 after 20 years.

Interestingly, being invested on the ten best stock market days is essential. In fact, this largely determines the overall annual result, also see Figure 1. Not being invested during these days has a strong depressing effect on the overall portfolio result.

There are countless examples of this kind and it shows that the total annual return of a portfolio is largely determined by just a few days each year. Unfortunately, it is just not possible to determine in advance which trading days will be the best and which the worst. Therefore, staying invested is a wise option even in turbulent times. Still trying to time the market? Then you may get lucky, but the chances that you will lose out are many times higher.

Judith Sanders

Investment Strategist