Market timing: Great in theory, but what's the reality?
30 July 2018 | Markets and Economy
While market timing may make sense in theory, allowing you to buy low and sell high, few manage to do it in practice. In fact, study after study has proven that trying to time the market tends to be detrimental to one's financial health.
Our chart below shows the performance of different equity and bond categories over the last several years. As can be seen, persistence among asset classes is fleeting, with top-performing investments from one year often falling to the bottom of the rankings in subsequent years. Emerging-markets equities (pale blue in our chart) are a case in point. The result? Lots of volatility and, no doubt, lots of nervous investors.
So, what's the solution?
For those who want a smoother ride and a greater chance of investment success, we believe that a well-diversified fund, not only by asset class but also by region, could be the answer. Vanguard LifeStrategy® 60% Equity Fund, which recently celebrated its seventh birthday, is such a fund. It has delivered steady performance (white in our chart) and would have helped avoid the peaks and troughs associated with individual asset classes. Of course, it must be remembered that past performance is not a reliable indicator of future results. The fund also takes out the worry of trying to guess the best time to buy or sell. However, as with all investments, its value, and any income produced, may fall or rise and investors may get back less than they invested.
As US financial theorist William J Bernstein puts it: "There are two kinds of investors: those who don't know where the market is headed, and those who don't know that they don't know." Make sure you don't fall into the second camp.
Performance rankings and returns (%) for key asset classes and Vanguard LifeStrategy 60% Equity Fund
Past and simulated performance is not a reliable indicator of future results.
Source: Vanguard calculations, using data from Barclays Capital, Thomson Reuters Datastream and FactSet. UK equities defined as the FTSE All Share Index, Europe ex-UK equities as the FTSE All World Europe ex-UK Index, developed Asia equities as the FTSE All World Developed Asia Pacific Index, North America equities as the FTSE World North America Index, emerging markets equities as the FTSE Emerging Index, global equities as the FTSE All World Index, UK government bonds as Bloomberg Barclays Sterling Gilt Index, UK index-linked gilts as Bloomberg Barclays UK Govt Inflation-Linked UK Index, hedged global bonds as Bloomberg Barclays Global Aggregate Index (hedged in GBP), UK investment-grade corporate bonds as Bloomberg Barclays Sterling Aggregate Non-Gilts - Corporate Index. Returns are denominated in GBP and include reinvested dividends and interest. Performance shown is cumulative and includes the reinvestment of all dividends and any capital gains distributions. The performance data does not take account of the commissions and costs incurred in the issue and redemption of shares. Basis of fund performance NAV to NAV.
Please be advised that the performance of Vanguard LifeStrategy 60% Equity Fund prior to its inception on 26 June 2011 is simulated. Simulated performance figures do not represent actual fund activity and may not take account of relevant economic and market factors impacting actual fund performance.
Discrete five-year net performance of Vanguard LifeStrategy 60% Equity Fund
Source: Vanguard. Data cover 30 June–30 June of each year.
Investment risk information:
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.
The fund may invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.
The fund may invest in in smaller companies which can be more volatile than investments in well-established blue chip companies.
Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.
The fund may invest in financial derivative instruments that could increase or reduce exposure to underlying assets and result in greater fluctuations of the fund's Net Asset Value. Some derivatives give rise to increased potential for loss where the fund's counterparty defaults in meeting its payment obligations.
Other important information:
This document is designed for use by, and is directed only at persons resident in the UK.
The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of [units/shares] of, and the receipt of distribution from any investment.
The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.
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The opinions expressed in this article are those of individual authors and may not be representative of Vanguard Asset Management, Limited.
The Authorised Corporate Director for Vanguard LifeStrategy® Funds ICVC is Vanguard Investments UK, Limited. Vanguard Asset Management, Limited is a distributor of Vanguard LifeStrategy Funds ICVC.
For further information on the fund's investment policy, please refer to the Key Investor Information Document ("KIID")
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