Tempted to time the market in 2024? Resist the temptation.
Recent market action is a reminder that timing is a tricky business. Sentiment was sour in early November as investors fretted about war in the Middle East, lacklustre earnings and surging rates, only for the S&P 500 to then enjoy its best week of 2023, gaining 5.82 per cent.
Since 2010, notes Bespoke Investment, a $100 investment in the S&P 500 would have nearly quadrupled to $391, but you’d have less than half that amount ($194) if you missed the best week in each year. Over half the gains since 2010 can be traced to just 14 weeks.
Similarly, DataTrek Research’s Nicholas Cols notes that there have been nearly as many down days as up days this year. Nevertheless, the S&P 500 is up 19 per cent.
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Missing a few days is very costly. Traders might respond by pointing to some timing system or other, but a new Dimensional Fund Advisors study suggests that’s a bad idea. Testing 720 different strategies, the researchers found “30 timing strategies that worked – and 690 that didn’t”.
[ Counterintuitive tale of an investor with terrible timingOpens in new window ]
[ The trouble with timingOpens in new window ]
Even the best strategies faltered if you tweaked some parameters. Nor did they work in all markets. Each of the 720 strategies was flawed in one way or another.
The takeaway: stay invested instead of trying to “predict the unpredictable”.
