Over the course of a summer, it is not unusual for the stock market to be a topic of conversation at barbeques or other social gatherings.
A neighbour or relative might ask about which investments are ‘good’ at the moment. The lure of getting in at the right time or avoiding the next downturn may tempt even disciplined, long-term investors. The reality of successfully timing markets, however, is not as straightforward as it sounds.
Outguessing the market is difficult
Attempting to buy individual stocks or make tactical asset allocation changes at exactly the ‘right’ time presents investors with substantial challenges. First and foremost, markets are fiercely competitive and adept at processing information.
During 2018, a daily average of $462.8 billion in equity trading took place around the world. The combined effect of all this buying and selling is that available information, from economic data to investor preferences and so on, is quickly incorporated into market prices. Trying to time the market based on an article from this morning’s newspaper or a segment from financial television is futile. It is likely that information is already reflected in prices by the time an investor can react to it.
Dimensional Fund Advisors recently studied the performance of actively managed US-based mutual funds and found that even professional investors have difficulty beating the market. Over the last 20 years, 77% of equity funds and 92% of fixed income funds failed to survive and outperform their benchmarks after costs.
The positive news is that investors do not need to be able to time markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise.
In recent months, the ‘noise’ has been led by politics and it is easy to believe this can have a greater impact on investment than is factually correct. Studies prove that over the long run, the market has provided substantial returns regardless of who lives at Number 10.
There has been no shortage of speculation about how politics and in particular, political leaders, will impact the stock market. The graph below helps to explain why investors would be well-served avoiding the temptation to make significant changes to a long-term investment plan based upon these sorts of predictions.
It shows the growth of £1 invested in the UK market over more than 60 years and 12 prime ministers (from Anthony Eden to Theresa May).
This exhibit does not suggest an obvious pattern of long-term stock market performance based upon which party has the majority in the Commons. What it shows is that over the long run, the market has provided substantial returns regardless of who is in power.
Growth of one pound Invested in the Dimensional UK Market Index January 1956–December 2016
Source: Dimensional Fund Advisors
Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants— including expectations about the outcome and impact of elections.
While unanticipated future events (genuine surprises) may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. So it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a political event.
Equity markets can help investors grow their assets, but investing is a long-term endeavour. By focusing on the things they can control (like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes) investors can better position themselves to make the most of what capital markets have to offer.
To discuss our disciplined approach to investing, please contact a member of our adviser team on 020 7636 7006.