Timing the market

"time in the market, not timing the market "  -  At Mobius, we tested this theory using our large data set. 

 

 

 

 

The results suggest that Mobius provides a really good success ratio to remain invested. This ratio for all possible permutations of (1-, 3-, 5- and 10- ) year periods over its near 23 years in activity shows a respective 68%, 77%, 89% and 100%.  This for example means that there was a positive return for all possible 155 10-year periods;  and an 89% positive return for 5-year periods (that is  192 of all possible 215 5-year periods). In other words, if you invested in any month of the past 13 years in Mobius for a period of 10 years, you would not have lost out.


What does it mean?

Timing the market is often the term used to define a difficult situation that any investor has to address in the face of (global) stock markets turmoil (forecast or in-progress). This is NOT about one’s particular portfolio’s performance or sectors, rather the market as a whole driven by macro-level sways. The key point of timing the market is the decision to remain invested or time a (full/partial) withdrawal from the stock market is a difficult call.

In timing a market, the main challenge is timing the “exit & re-entry”. Many investors claimed to have ‘got out at the right time’: Some of them have either reinvested at lower prices or waited too long.  In 2008, the Mobius club was no different, as we discuss further down. When prices are lower it suggests further bad news, so investors wait. Natural tendency is to “wait for the market to stabilise”, by which time of course it has usually risen significantly. In February 2020, the Mobius club has decided to remain invested in the face of Covid-19 pandemic.

By in large, historical data seem to suggest the benefits of being invested rather than trying to time the market. A number of studies performed on the FTSE-All share demonstrate that, broadly speaking, the longer the timeframe, the greater the chance of success. One such study from Hargreaves Lansdown considered different timeframes typically 1, 3, 5 and 10 years over a span up to 30 years.  It then reviewed the proportion of these periods where investors would have at least had a positive return.


Current climate

The current global crisis triggered by Covid-19 (coronavirus pandemic) has in turn sparked global uncertainty on all stock markets and world economies. In a way, this pandemic, taking by surprise the World and all, has dwarfed the pre-February 2020 global investment concerns such as  one of the longest Bull run, China/USA trade-wars and of course Brexit.  Many investors already considered timing the market in late 2019.

Most stock markets have partially recovered from the February/March 2020 losses (when the pandemic started to become a global reality), with initial losses of approximately 25 to 35%.  This recovery is upwards by roughly 20% at the time of writing, powered in great part by governments’ stimulus in support of employments, loan guarantees and incentives for consumer spending. Whether this would be enough to sustain the current market valuations remain to be seen.


The test: How does it work?

 A simple experiment to quantify the decision of timing the market or staying invested uses “a multi-period all-permutations test”. This latter examines the investment returns for all of possible combinations of 1-year, 3-year, 5-year and 10-year periods on a rolling one-month basis.  We choose a one-month unit because the Mobius investment club performs its account and unit valuation on a monthly basis.  By way of example, there are 25 combinations of 1-year period in a 3-year span. Take a 3-year duration between September 2017 and August 2020. There are 25 combinations of 1-year (on a rolling one-month basis), starting from Sept-17 to Aug-18, Oct-17-Sept18, Nov17-Oct18, all the way to Aug19-Jul20 and finally Sept-19-Aug20. 

Once the number of periods over a span is established (25 in the example above), the number of periods with positive returns is calculated. The ratio of periods with positive returns over the total number of periods is defined as the success ratio.


Mobius club's perspective

We compiled the test using the Mobius club data set. The chart & table (right side) illustrate the effect of time since its creation in October 1997.  We analysed the data for all 4 periods (1-, 3-, 5-, and 10- ) year on a rolling one-month basis. For example, of all 263 1-year periods, 178 (68%) of these have turned a positive return, compared to 89% for 5-year periods, that is 192 out of 215 periods with positive returns. For the 10-year timeframe (155 periods), the success ratio was 100%.

 

 

It is easy to understand why 5 years is often stated as a minimum timeframe – beyond this the probability of making a loss is greatly reduced. Note the investment profile used as basis for all these data assumes a regular monthly investment (which is a common pattern for UK investment clubs such as Mobius).

Periods

Positive returns / all periods

In percentage terms

1-year

(178 / 263)

68%

3-year

(185 / 239)

77%

5-year

(192 / 215)

89%

10-year

(155 / 155)

100%


Drilling further

The table below looks at the next level of detail; that is the range of returns (min, max, average and standard deviation) for each of the 4 periods.  So for example, of the 263 1-year periods, the lowest return was a staggering loss of 48% (period ending June 2001). One simple observation is that the average return (~7 to 8%) is broadly similar for all 4 periods (1-, 3-, 5-, and 10- ) year but the variance (standard deviation) is high. This further strengthens the argument for longer time-frames

Periods

Lowest return

Highest return

Average return

Standard deviation

1-year

-48%

53%

8%

15%

3-year

-21%

31%

7%

9%

5-year

-7%

23%

8%

7%

10-year

1%

18%

7%

5%


Continuous challenge

The Mobius team has been reviewing on a continuous basis the current macro-economic situation, notably the impact of the ongoing Covid-19 pandemic.  Somehow, the current pandemic has eclipsed the other (significant) concerns such as Brexit that stretched from June 2016 to-date, with no clearer insights thus far. Coupled with that, China/US trade wars and one of the longest bull market run in stock exchange history (only partially dented by Covid-19 impact): There is enough to worry any investor, let alone when a group of investors start to ponder together. Apart from some initial discussions  to go partly in cash (which from time to time re-surface in the Mobius monthly meetings), by in large the club attitude so far has been to remain invested (unlike 2008).


Lessons learnt:  Exit & re-entry in 2008

During the “slowly-developing” financial crisis of 2008, there was a much debated & then consensus within the club to go for a full withdrawal (timing the market). The exit in 2008 was pretty well executed and the Mobius fund went all cash (liquidated all investments). As indicated in the chart below, the straight-ish Mobius (blue) line in the 2008 period shows a fully-cashed fund. The FTSE All share continued its fall. However, where Mobius team did not do so well - is to have agreement on the re-entry point, waiting for the market to “stabilise”. The point is that by the re-entry time, many stock prices had already gone higher than when the club sold. On can see in the chart where  the FTSE-All Share outstrip the Mobius fund in 2009: This has used many hours of discussions in monthly meetings: This has been a “lessons learnt” for the Mobius team.

 

 

 

Disclaimers: (1) the past is not necessarily a reliable guide for future returns. (2) This note does not offer any advice on investment or otherwise in the stock market. The report offers a reflection from the Mobius club’s perspective on the subject of time in the market, not timing the market”

Work in Progress: Thank you for your visit. For any feedback, you may contact Mourad Kara.   Last update: September 2021. © Mourad KaraDisclaimers