The annual returns on the Johannesburg Stock Exchange (JSE) All Share Index (ALSI) for the period 1960 – 2013 are shown in the graph below.
The ALSI has been negative for 13 of the 54 years (26%), and therefore it has been positive 76% of the time.
Time in the Market versus Timing the Market
The fact that the market returns fluctuate suggests that there may be a “best time” and a “worst time” to invest on the JSE.
The “worst time” should theoretically be when the market has had a positive return and is entering a negative phase e.g. in 1960 the return on the ALSI was – 11.9% (including dividends), so the “worst time” to invest was at the beginning of 1960.
The “best time” to invest should then be at the end of the negative period when the market is turning positive – the” best time” to invest should therefore have been at the beginning of 1961.
A comparison is done below to show the effect of investing at the peak or the trough of the market. “Perfectly Wrong” timing suggests that investments were made at the beginning of each negative period i.e. 1960, 1969, 1975, 1981, 1987, 1990, 1993, 1997, 2000, 2002 and 2008. These investments have then been held continuously since the time of acquisition until October 2014.
“Perfectly Right” timing suggests that investments were made at the beginning of each positive period i.e. 1961, 1971, 1977, 1982, 1988, 1991, 1993, 1999, 2001, 2003 or 2009. These investments have also been held continuously since the time of acquisition until October 2014. The Table and graph below show the effect on the annualised returns over these periods.
Over the short term an investment that has been perfectly timed does outperform an investment that has been imperfectly timed, but over the long term the values tend to converge to the extent that over 54 years the difference is only 0.6% per annum.
Using a 15 year period from 1989 – 2014 the difference is 0.9% per annum.
This is an indication that being able to “time” the market perfectly does give improved performance, but the difference is insufficient for investors to stay out of the market waiting for the “perfect” entry point. With the benefit of hindsight it is easy to identify the perfect moment, but in reality it is extremely difficult.
Using an even shorter term example, the graph below shows the current values of an investment of R1,000 in the various asset classes in 2007 prior to the market correction on the JSE in 2008. Although fixed deposits offered better returns in the short term, the value of an investment in listed property in October 2104 will be worth 26% more than the fixed deposit and and an investment in ordinary shares 23% more than the fixed deposit.
Ultimately this suggests that time in the market still offers the best return regardless of the stage of the market cycle.
Christopher Jordan CFP®.
B. Comm (Hons); MBA; PG Dip. (Financial Planning).
11 November 2014.