At the beginning of the year, we came across a compelling piece that showcased a story about investors attempting to time the market. The objective was simple – which strategy performed best across the last two decades?
The below information is for illustration purposes only. The original article written September 14, 2022 by Brett Kujala; Business Development Manager at Fidelity Investments Canada ULC is as follows:
Buy low. Sell high.
Four words that are so easy to utter, but difficult to do consistently. What about just buying high?
We’ve created a game below pitting various investors against one another. Our characters are the Perfect Timing Investor, the Bad Timing Investor, the Nervous Investor, the Monthly Investor, the Beginning of Year Investor, and the Cash Investor.
Our game is simple. From 2001 - 2022, each investor is given $2400 at the beginning of the year and invests into Fidelity Canadian Large Cap Fund according to their profile.
- Perfect Investor: Through skill or luck, this investor placed their $2400 into the market every year during the month the market hit its low point. For example, in 2001 Canadian Large Cap bottomed during November, so this was the month they invested. In 2002, Canadian Large Cap bottomed in October, so this was the month they invested. They continued to time it correctly every year.
- Beginning of Year Investor: Keep it simple. Every year when they get their $2400, they invest immediately in January.
- Monthly/Dollar Cost Averaging Investor: Timing the market perfectly is difficult so they decide to divide their $2400 into 12 equal $200 amounts to invest every month.
- Worst Timing Investor: They had the worst timing and invested their $2400 during the month the market peaked each year. For example, in January 2001 the Fidelity Canadian Large Cap peaked in January so this was the month they invested that year. In 2002, Canadian Large Cap peaked in April, so this was the month they invested.
- Cash Investor: This investor wanted no risk, so they invested their $2400 every January into a 3% yielding government bond.
- Nervous Investor: Every time the market goes through a sharp correction, they sell. When the market starts to improve, they re-purchased the Fund. (Nervous Investor time periods leaving the market and returning to the market are in a table at the end of this article.)
Who wins? It’s no surprise the Perfect Investor wins. What is surprising, though, is they only end up with $10,000 more than the Beginning of Year Investor. Being perfect versus spending the most time in the market yielded little difference for their efforts.
What’s more surprising is where the remaining investors finish. The Worst Timing Investor finished ahead of the Nervous Investor and Cash Investor. Bad timing still beat doing nothing.
Disclaimer: The rate of return is used only to illustrate the effects of compound growth and is not intended to reflect future value of the mutual fund or returns on investment in the mutual fund. This material is not to be construed as an offer or solicitation. The securities mentioned may not necessarily be considered suitable investments for all clients. Contact your Advisor to discuss your individual investment needs. Source: Morningstar, Jan 1, 2021 to Dec 31, 2022.
The best part of a great story is that the moral tends to carry out across time. The moral remains that timing the market is nearly impossible and even if you do it correctly, you don’t win by much. The best idea seems to be spending as much time in the market as possible (Beginning of Year Investor), or dollar cost averaging.
You all successfully managed through one of the most difficult market periods in history - not just in the last few years, in history. That is a great accomplishment to you all and nothing to be viewed lightly. I hope this game is helpful as you reflect on which character you’d like to be.