- According to the DWS Research Institute, market timing is not the key to successful long-term investing.
- Much more important is the right asset allocation – which accounts for roughly 90 per cent of portfolio returns.
- Multi-asset funds make it easy for investors to invest flexibly and adapt to changing market conditions.
Thinking about the best time to buy just isn’t worth it in the long run.
Apart from stock selection itself, investors worry about few things as much as market timing. Understandably they fear putting their money in ‘at the wrong time’ and paying for it. This fear of missing the ‘best’ price weighs on investors' minds and sometimes paralyses them. And the result is that the opportunity to invest is missed indefinitely.
It’s almost impossible to pick the highs and lows
It’s almost impossible to hit a price low perfectly on the stock market. When it happens, it’s usually just luck. It takes a lot of confidence to buy when others are selling. Investors are social beings who don’t like to stand up to the crowd. It’s also therefore hardly surprising that many investors are infected by the general euphoria when prices are soaring. If everyone is buying, it must be the right thing to do, mustn’t it?
But all the angst about market timing isn’t worth it. The analysts at the DWS Research Institute find that market timing can have a strong influence on short-term returns. But over the long term the differences largely disappear.
Buying at a high hurts in the short term
Investors who bought US equities in April 2000, for example, did so at a time of extremely high valuations. What followed was one of the worst price slumps in stock market history. Over five years annual returns from the high were minus four percent, and over ten years minus one percent. By contrast, those who entered the market twelve months after the peak enjoyed an annual return of two percent over the following five years.
The right asset allocation accounts for 90 percent of a portfolio's performance
Patience pays off for investors
But in the long run the impact of timing the market well shrinks. Over a 15 year investment horizon, the annual yields on a purchase at the market peak and a purchase twelve months later were only about one percentage point apart. Patience shrinks the differences in returns due to timing and brings asset allocation to the fore. According to the experts at the DWS Research Institute, asset allocation accounted for 90 percent of the performance of a portfolio.
Anyone wishing to provide for old age or invest for the long term should therefore pay particular attention to the right mix in their portfolio. For many, mixed funds can be the right choice.