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The Intelligent Allocator: the comforting illusion of market timing
Michael Strobaek
Global CIO Private Bank
Clément Dumur
Portfolio Manager
key takeaways.
Markets tend to rise over time and corrections tend to be less frequent than people assume; so waiting to invest can have a price
Buying opportunities can be psychologically hard to act upon, while markets are usually efficient at discounting known risks, making it hard for an individual investor to gain the edge
Attempts to avoid a market correction can therefore prove more costly for returns than the correction itself
We emphasise discipline, diversification, and long-term goal setting as the most reliable tools for enduring the inevitable turbulence of markets
This second in a new series of short articles aims to answer key investor questions about deploying capital into financial markets. These reflections are geared to a long-term perspective with general answers to some of investors’ toughest decisions. Grounded in historical data, our analysis builds on long-term evidence. At the heart of each of these papers is a simple premise: what investment choice should I make?
Should attempts to time the market form part of an investor’s tool-kit? We review the statistical evidence and the potential costs of staying on the sidelines.
In our inaugural edition of The Intelligent Allocator, we weighed the merits of lump-sum investing versus dollar-cost averaging – two disciplined approaches to entering the market after a major liquidity event. Yet as is often the case in investing, one question tends to lead to another. A recurring theme in our client conversations is whether investors should wait for an attractive buying opportunity, or commit capital and then stay invested. The notion of waiting for the ‘right moment’ or a 'better level' sounds appealing, but deserves to be tested not as a ‘prediction’ but through historical evidence and experience.
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In an era when two-thirds of the global population is immersed in social media, market and geopolitical news is never in short supply. This stream of news can offer the raw ingredients to make would-be or existing investors permanently nervous.
The truth is that the most attractive buying opportunities are almost always the hardest to act upon. Veteran market analyst Walter Deemer captured this irony well in his book title, ‘When the Time Comes to Buy, You Won’t Want To.’ At moments when conditions are most favourable for long-term gains, uncertainty and pessimism tend to take over – making the act of buying or staying invested psychologically difficult, even if such moments are the most rewarding over time.
The most attractive buying opportunities are almost always the hardest to act upon
What are you waiting for? The price of patience
Consider a simple exercise: two investors begin each year on 1 January. One waits for a 10% correction before investing, holding cash and earning the 3-month US Treasury bond rate in the meantime. The other invests immediately in the S&P 500 with no attempt at timing. Both compare results at the end of the year on 31 December. Since 1990, the “wait-for-the-correction” investor underperformed the “invest-now” investor by an average of 5.4% per year, and lagged more than half the time.
Why such a disparity? Because cash will never rally. Equity markets on the other hand, over time, tend to rise and corrections are less frequent than many people assume. Since 1990, the S&P 500 has experienced an intra-year correction of at least 10% only about one year in every two, and bear markets - declines of 20% or more - only one year in six. As we noted in our earlier article, we believe investors are best served by maintaining discipline. Rather than attempting to time the market, we suggest entering through either lump-sum investing or dollar-cost averaging. The choice between the two should reflect the investor’s need for short-term risk mitigation, not a forecast of market direction.
The cost of discounting the obvious and fearing the unknown
The logic behind timing a potential correction is often more psychology than data-driven. Markets tend to quickly discount widely recognised risks. When a risk – such as a potential recession or anticipated interest rate hike – is widely discussed, it is almost certainly already reflected in prices. An individual investor has little chance of being ahead of the market. However, as a result, if the eventual impact occurs, it may prove less severe than feared.
History shows that enduring volatility is far more rewarding than attempting to outsmart it
The real danger therefore lies not in the risk itself, but in the divergence between perceived and actual risk. In this context, market shocks generally come in two forms:
Exogenous shocks – wars, pandemics, or other unforeseeable disruptions – which are impossible to anticipate with precision. They represent the “unknown unknowns”.
Endogenous, or financial market shocks are tied to valuation excesses and structural imbalances: bubbles, in other words. These risks are easier to observe but still nearly impossible to time. The ‘Nifty Fifty’ boom of the 1960’s and 70’s, and the dot-com era that burst in 2000 both lasted longer than sceptics expected, and attempts to avoid them often came at the expense of compounded returns.
Our view is that perfect timing is therefore just a comforting illusion. The idea of catching the exact bottom or sidestepping every correction is seductive – but rarely possible. History shows that enduring volatility is far more rewarding than attempting to outsmart it. What drives long-term wealth is not precision timing but participation. History suggests that the real edge lies in staying invested with an appropriate risk profile and asset allocation while allowing the quiet power of compounding to do the hard work.
In the short run, markets will almost always look overstretched, and geopolitics will almost always give investors pause. But attempts to avoid a correction could prove more costly for returns than the correction itself. This is why we continue to emphasise discipline, diversification, and long-term goal setting as the most reliable tools for enduring the inevitable turbulence of markets. Put simply, jump in or lose out.
CIO Office Viewpoint
The Intelligent Allocator: the comforting illusion of market timing
This is a marketing communication issued by Bank Lombard Odier & Co Ltd (hereinafter “Lombard Odier”).
It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication.
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