“Can we time the market?” is a question we often get. Given the recent uncertainty and turbulence, it does not come as a surprise that clients are wondering about this question. “Is there a magic ball we can use to predict the future of markets?” “Is there a way to time or predict the market?” “What share will make lots of money and have no downside?”.
Using 20 years of data from JP Morgan, see below, if you invested $ 10,000 in the S&P 500 between January 1, 2003 and December 30, 2022. If you invested the entire time, your investment would have grown to $ 64,844, an annual return of 9,8%, compared to timing the market and missing 40 of the best days, your investment would be worth less, $8048, a -1.1% annual return.
As historical data shows, the best days happen during market turmoil and periods of heightened market volatility. Warren Buffett’s strategy for coping with a down market is to approach it as an opportunity to buy good companies at reasonable prices. Buffett has developed an investment model that has worked for him and the Berkshire Hathaway shareholders over a long period. To benefit from the market, one must be invested in the market.
2022 was a terrible time in the markets, locally and abroad, returns were down in most asset classes and jurisdictions. Many South African investors moved their investments out of equities and into cash and bonds, preferring to cut their losses and hide in secure asset classes.
But in November 2022, the global equity market turned and the MSCI All Country World Index returned 7.8%, in US$ for the month. Developed markets underperformed emerging markets, with the MSCI World Index returning delivering 7.0% and the MSCI Emerging Markets Index 14.8%.
In South Africa, despite the petrol price falling and the annual CPI rising to 7.6%, equities rose due to improved global sentiment. The JSE All Share Index returned 12.3% and the rand appreciated, gaining 7.8% against the US dollar, and 3.8% to the pound sterling. Those who remained invested in the market benefited and ended the year with positive returns as they followed the principle of not selling out of a bad market. Unfortunately, those who switched out of equities missed the turnaround and locked in their losses when they disinvested. If they were to reinvest in the stock market, they would be buying at a higher price than what they sold them. An all-round loss situation for those investors.
There are a few truths we cannot escape, death and taxes and there is no easy way to make money. Markets can be volatile and cyclical but to get above inflation returns, one must be invested in the markets. Unfortunately fear and greed are the greatest erodes of wealth and unless one remains cool-headed and focused on the long-term benchmark, one can get swept up in market sentiment and lose focus.
Sources: www.advisor.visualcapitalist.com ; www.moneyweb.co.za and www.mandg.co.za