your money

An Investment Strategy That Defies Time

Frank Trotter | May 1, 2016 5 MIN READ

When investing, we all get a little nervous or hesitant over timing. The questions flow naturally and consistently: “Should I buy now?” “Is today the best time to sell?” It’s anxiety-inducing to be sure. Forecasts, as I’ve written about previously, are often wrong. Yet we listen to the commentary, read the news and study the fundamentals. It’s the best we can do when trying to time a market investment to our advantage. When asked to explain his own success, Baron Rothschild was quoted as saying, “I never buy at the bottom, and I always sell too soon.” But who knows when those will occur? I have found it rare indeed when a new direction in the market is discovered before it occurs. So, what if we simply removed timing from the equation?

It All Begins With Discipline

One way to defeat the anxiety of attempting to time the market is simply to lay out a plan and invest a specific amount each month toward that goal. Some refer to this technique as “dollar-cost-averaging,” a term I don’t care for very much since it seems to suggest that you will achieve a better price just by investing on a regular basis, which is not necessarily the case. Instead, I refer to it as “disciplined progressive investing” (DPI). This implies that the individual is executing on a specific plan to save for the future, and also acknowledges that market moves are not something we can know in advance.

When you use DPI, you invest a fixed amount of capital in a particular asset at a certain frequency, regardless of market price. It is the thinking behind EverBank’s own precious metals purchase plan (non-FDIC insured). And since you’re investing the same dollar amount each period, simple arithmetic dictates that you will end up buying fewer units of the asset when prices are higher and more when prices are lower.

Some analysts suggest that, over time, this will reduce the average cost of the assets you purchase. I have no solid empirical evidence either way on this hypothesis, but I do think that making a plan and sticking to it can make a difference in your personal investing success.

So What Are the Benefits of Disciplined Progressive Investing?

It eliminates the conceit that we can time the market. Sure, buying low and selling high is certain to make you money. That’s why so many attempt to time the market. But doing so is much easier said than done.

In fact, there’s research that shows how trying to time the markets can hurt your performance over the long term. You may end up investing a big chunk of your portfolio at a high point in the market cycle, or exiting the market at a low. In other words, you may end up buying high and selling low, which is the exact opposite of what you should be doing.

The market research firm Dalbar has a decades-long history of mutual-fund research and studies. The company’s Quantitative Analysis of Investor Behavior (QAIB) measures how investors’ decisions to buy, sell and switch into and out of mutual funds affect the performance of their portfolios.1

Over the years, the results have consistently shown that the average investor earns less, and in many cases much less, than mutual funds’ advertised performance. This is evidence that most investors move money in and out of the market at exactly the wrong time, thus hurting the performance of their portfolios.

Using data from the QAIB report, the investment firm Blackrock compared the performance of the average investor with the performance of major asset classes from 1992 to 2011. According to this study, the average investor has earned an annual return of 2.3% during that 20-year period.2

As we can see in Figure 1 below, the results of the Blackrock report suggest this underperformance happens because of bad market timing.

Figure 1. The Average Investor Underperforms

20-Yr Annualized Returns by Asset Class (1992-2011)

Source: Blackrock

In another mutual fund study, Mark Hulbert also suggested that market timing is not a good strategy for investors.3 His research found that actively managed funds are much more likely to underperform their asset classes by a consistent 2% to 3%. He concluded that “market timing and actively managed mutual funds generally hurt investment performance more than they help it.”

But perhaps the most famous market timing study is the one commissioned by Towneley Capital Management and conducted by Professor H. Nejat Seyhun. Professor Seyhun studied stock market returns and risk for the months between 1926 and 2004, and for all trading days between 1963 and 2004.4

The study was designed to investigate the dangers of trying to time market fluctuations. It showed that practically all of the market’s gains or losses over several decades occurred during only a handful of days or months. Investors who try to time the market could easily end up missing those few days that offer substantial payoffs simply because they’re out of the market.

For example, the study showed that 96% of market gains between 1963 and 2004 occurred during only 0.85% of the trading days. This suggests that investors who are waiting to invest are taking a big risk that they will miss the relatively few trading days when the market generates its highest returns.

The research also showed that between 1926 and 2004, more than 99% of the total dollar returns were earned during only 5.1% of the months. During that period, the U.S. stock market had a geometric average annual return of 10.04%. Based on that return, an initial investment of $1.00 in 1926 would have earned a cumulative $1,919.18. Missing the best 48 months, or 5.1% of all months, reduces the annual return to 2.72% and the cumulative gain to $6.46. Figure 2 below shows the impact of missing the best months on long-term performance.

Figure 2. Missing Only a Few of Best Performing Days Can Devastate Long-Term Returns

Source: Towneley Capital Management

Timing is not everything, or the only thing. If you think that DPI is a strategy that could work for you, go ahead and make a plan and set some goals. Then simply start investing gradually toward the results you look forward to.

Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank Trotter
Frank Trotter
Executive Vice President, Chairman Global Markets
Frank has over 35 years of experience in banking and global markets. When not in the office, you might find him speaking on the financial conference circuit, giving an interview on the latest world economic news, or at the nearest ice rink playing pick-up hockey.

All statements, comments and opinions expressed are solely those of the writer or speaker and are not the statements, comments or opinions of EverBank or of any of its affiliates, and are subject to change without notice. Due to the rapidly changing nature of currency and commodities markets, any statement, comment, or opinion may quickly become outdated. This is not a solicitation for the purchase or sale of any securities or options on securities or for the purchase or sale of a currency or any precious metal, and it does not constitute a recommendation to you or to any specific person of any particular action. EverBank, its officers and employees do not provide investment or other types of advice. All factual information has been obtained from sources that the writer or speaker believed to be reliable, but the accuracy, completeness, and interpretation of the factual information is not guaranteed and has not been independently verified. Not all products are right for everyone. You should conduct your own research and/or consult your advisor before making any purchases.

  1. DALBAR.com - QAIB. Retrieved May 04, 2016, from DALBAR.com
  2. Investing and emotions. The ups and downs of the market. Blackrock, 2013.
  3. Hulbert, Mark. The importance of staying the course. The New York Times, 2003.
  4. Seyhun, Nejat H. Towneley market timing study – stock market extremes and portfolio performance, 2005.