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Inside the Market Here’s proof that you’re wasting your time trying to time the market

Trying to time the market might be tempting but it’s failure-prone. Most investors should focus on the fundamentals instead.

A perfect timing method was recently investigated by Andrew (Drew) Dickson, the founder of London-based Albert Bridge Capital. He compared the results of two different U.S. investors. Both put $1,000 a year into the S&P 500 index for 30 years before they retired at the end of 2018. (The results are in U.S. dollars and include dividend reinvestment.)

The first investor was supremely lucky. They bought at the index’s low each year based on daily closing prices and thereby accumulated a nest egg of $156,000 (rounded to the nearest thousand). The odds of buying at the low each and every year would have been remote indeed. Winning Lotto 6/49’s grand prize would have been more likely.

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Mr. Dickson suggested imagining what would have happened to the investor’s unlucky twin who, instead of buying at the low each year, put their money in at the high each year. How much worse off would they have been at the end of 2018?

It turns out they didn’t fare too badly. The extraordinarily unlucky investor accumulated a nest egg of $122,000. Their retirement portfolio was worth 78 per cent of the lucky investor’s portfolio. The modest difference between the best and the worst result should provide solace to nervous investors who worry about buying at the wrong time.

If you’re like me, you’re probably wondering whether the Canadian market yielded similar results. To test the situation, I looked at three model portfolios that put $1,000 into the S&P/TSX Composite Index each year from the start of 1977 to the end of 2018. The lucky investor bought in at the lows for the year, the unlucky investor bought at the highs, and a steady investor bought at the start of each year.

The accompanying chart shows the growth of all three portfolios (since 2000). The Canadian results include dividend reinvestment, adjust for Canadian inflation, use daily closing prices and are presented in Canadian-dollar terms.

The lucky investor who bought at the lows each year ended up with a portfolio worth $183,000. The unlucky investor who bought at the market highs each year wound up with a portfolio worth $143,000. The steady investor who bought at the start of each year finished with $163,000.

The difference between the lucky and unlucky cases is relatively small, with the unlucky portfolio worth 78 per cent of the lucky one at the end of 2018. The steady investor who bought at the start of each year wound up with a portfolio worth 89 per cent of the lucky one.

Instead of trying to figure out the best day to buy each year – a virtually impossible task – investors might be better off looking for ways to reduce fees, taxes and other trading frictions.

For instance, the lucky investor’s advantage would have been eliminated by the inclusion of an annual fund fee of about 0.39 per cent, which reduced the ending portfolio to the $163,000 mark.

Most Canadian funds charge annual fees well in excess of 0.39 per cent and many charge more than 2 per cent annually. On the other hand, good index funds have tiny annual fees. For instance, the iShares Core S&P/TSX Capped Composite Index ETF (XIC) charges a fee of 0.06 per cent.

The fee difference between expensive funds and low-cost funds could easily overpower the difference between a lucky and an unlucky investor.

Even worse, temporarily good – or bad – timing is likely to wash out over time, while high fees are sure to bite into returns each and every year.

Instead of worrying about market timing, most investors would be wise to contribute to their portfolios regularly and pay more attention to fees and other investing fundamentals.

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.

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