Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
A common obstacle to beginning investing is that people put too much value into when to enter the market. But data indicate that it’s better to be invested for a long time than to try to time the market. Here’s three reasons why.
Compounding returns is the bedrock of long-term investing, and its value is often underestimated. When you invest, your earnings generate their own earnings over time. This snowball effect is most potent when investments are left to grow uninterrupted. For example, a USD 10,000 investment in the MSCI USA Total Return Index in 1980 would be worth around USD 1,050,000 in 2024, assuming all dividends were reinvested. This is an annualised return of 11.1%. So if you have a long investment horizon, it’s better to allow your savings to do their thing in the markets rather than trying to pick bottoms and tops or "timing" the market.
“It may not seem like a big thing at first, but the compounding effect over time is significant. So, and this cannot be understated, the most important thing in relation to investing is to get started. None of us are able to time the market anyway,” says Peter Garnry, Chief Investment Strategist.
Apart from compounding interest working in your favour over time, there are several other reasons why time in the market beats attempts at timing market entry. The first – and arguably most obvious – is that timing markets is an incredibly tough thing to do. Professional investors don’t believe they can do it, so you need a certain level of conviction to believe that you can.
“A very important point in relation to the idea of timing the market is that if you miss out on just a few of the good days, your return over time can suffer exponentially,” says Garnry. Also, timing the market comes with the risk that instead of avoiding the worst days on the market, you risk losing out on the best days, which may be a greater disservice to your savings. Consider the following data for the S&P 500 from 1991 to mid-2024:
Investment scenario | Annualised return (%) |
Fully invested | 11.0% |
Missed 10 best days | 8.5% |
Missed 20 best days | 6.8% |
Missed 30 best days | 5.3% |
Missed 40 best days | 4.0% |
The data above show that if you were fully invested throughout 1991–2024 in the S&P 500, you would have earned 11% annually on your investment. But if you missed just the 30 best days, you would have halved your entire return.
“The point is that of course we would all like to avoid the worst days in the markets, but missing the best days is also very risky, and manoeuvring in and out of the market at the right time seems almost impossible. So the most salient approach seems to be staying invested as long as you have a long time horizon,” says Garnry.
Missing the best days is, of course, a weird construct because most rallies, or rebounds, are sharpest when markets have sold off badly. So if you are missing the best days probably means that are you missing the worst days as well.
Another way to understand why time invested is more important than timing investment is by looking at your return since a given year in the past, comparing investing at the high (worst entry) or bottom (best entry) of that year. The table below shows annualised returns in US equities from a given starting year until today (mid-2024) based on the best and worst entry.
Year | Best entry | Worst entry |
1994 | 10.2% | 9.9% |
2003 | 10.8% | 9.7% |
2008 | 14.0% | 10.4% |
2013 | 13.5% | 12.4% |
2018 | 16.8% | 13.1% |
There are several conclusions we can draw. One of them is that in most normal years, the difference between perfect timing and the bad luck of entering at the worst possible moment is only around 1% annualised. Another conclusion is that when you do have a year with big swings or declines, the timing can make a difference, but being able to time the market is extremely difficult if not impossible.
The far more important lesson is that as you stretch out the time horizon to 30 years, the difference between perfect timing and random bad luck is very small. In our case, only 0.3% annualised (as evident from the difference between the best and worst entries in 1994, or 30 years ago). And in nearly all normal cases in which we are building our portfolios over many years at so many entry points along the way from our regular income, any risks related to timing are further diminished.
In general, the differences are so small that as an investor you should not overcomplicate when to invest. It is better to find cheap passive equity index funds and then make a plan for consistently investing your savings. “Unless you get lucky and hit the market at rock bottom, timing means very little because you postpone getting started, waiting for an event that might not happen and miss returns along the way. So instead, spend time finding the right investment for you – preferably at a low cost – and just do it,” says Garnry.