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Predicting the Future Isn't a Winning Investment Strategy- 07.20 Thumbnail

Predicting the Future Isn't a Winning Investment Strategy- 07.20

Michael D'Angelo- July 2020

When is the right time to invest in the market? Investment guru Warren Buffet is famously known for saying that the right time to invest is when you have the money. How accurate is this? Manulife Investment Management put this theory to test and the results are quite surprising.

Timing the market means buying or selling based on trying to predict economic trends. While it may seem like an easy enough concept, using this technique isn’t a winning investment strategy. In fact, if you sell at the bottom and sit on the sidelines in times of trouble, the anxiety of being in volatile markets is replaced with the anxiety of being out of the markets. Have they bottomed? Is this just a bear market rally? A dead cat bounce? Is this the recovery? It’s impossible to tell.

Nailing it

Just for argument’s sake, let’s say that it’s possible to buy at the perfect time every year — even though the odds are stacked firmly against doing this in any year, let alone every year. Mr. Right picks the perfect entry point for his capital year after year. Mr. Wrong has the other side of this equation. Although it would be just as hard to do, Mr. Wrong manages to pin down the worst day to invest every year.

Comparing the two, we see that they’re actually not that different, which leads us to the conclusion that it’s time spent in the markets, not timing the markets, that tends to generate returns. The biggest difference in the compound annual growth rate between the two investors for any given year in the market is about two percent. If we look at the third investor, Mr. Consistent, who invested on the same day (Dec. 31) every year — no matter what — the difference is even smaller.

This study concludes that investing on the best/worst day over a long period of time won't make much of a difference. Warren Buffet is correct. The best time to invest is when you have the money.