The cost of market timing
In this week’s video insight, I discuss how the pandemic reshaped investor behaviour, leading to riskier trading and poor market timing, as highlighted by Derek Horstmeyer, a finance professor at George Mason University in the U.S. Many investors lost billions annually due to panic-driven decisions, emphasising the importance of a long-term approach. I discussed the importance of viewing markets as opportunities to invest in real businesses rather than speculating and underscored that long-term strategies outperform attempts at timing the market, as evidenced by the Montgomery Small Companies Fund’s returns over the last two years.
Hi everyone, I’m Roger Montgomery and welcome to this week’s video insight where we dive into the financial world to help you invest smarter.
Today, we’re tackling a fascinating and somewhat alarming recent trend that really reinforces something we have always known.
Today’s insights come from an excellent article by Derek Horstmeyer, a finance professor at George Mason University in the U.S.
Let’s set the scene: The COVID-19 pandemic didn’t just wreak havoc on public health and global economies – it disrupted how individual investors approach the markets.
Now, in the back of your mind I’d like you to remember something I discussed in my book Value.able more than ten years ago. There are two ways to approach markets – 1) bet on the ups and downs and treat the market like a roulette wheel, or 2) treat the market as a venue where you can invest in parts of real businesses. We also know investors tend to buy at the highs, when it feels safest but isn’t, and sell at the lows when they have completely given in to their fears.
According to Horstmeyer, between 2020 and 2024, investors exhibited riskier and less efficient trading behaviours compared to pre-pandemic times. And here’s the kicker: this poor market timing has cost them billions of dollars annually in lost portfolio value.
In fact, from 2015 to 2019, poor market timing cost investors in actively traded mutual funds about half a per cent in annual returns. Post-Covid? That number nearly doubled to over 1.01 percentage points per year. Let me break that down – investors are leaving more money on the table now than ever before, thanks to panic selling and buying at the wrong time, for example, because of a fear of missing out (FOMO).
Two years ago, at the end of 2022 we said that stocks were cheap and with price-to-earning (P/E) ratios at historic lows, especially for small caps, all that had to happen was good earnings growth to drive attractive investor returns. We said back then, if P/E’s expanded again, investors would make a motza.
Indeed, in the last two years, the Montgomery Small Companies Fund has generated a return of 30.57 per cent or 14.27 per cent per annum. For completeness, The fund has generated 9.59 per cent since inception on 20 Sep 2019 versus 4.64 per cent per annum for the benchmark S&P/ASX Small Ordinaries Accumulation Index
So why are investors leaving so much on the table? Horstmeyer suggests that during the pandemic, homebound U.S. investors – many of them new to the markets, became active traders. Internet forums like Reddit’s WallStreetBets and easy access to trading platforms fueled this behaviour. Unfortunately, this ‘trigger-happy’ trading persisted even as the pandemic’s immediate impacts faded.”
Of course, the key takeaway is: most investors are better off not trying to time the market. The data shows that even seasoned pros struggle with this. So, the next time you feel the urge to jump in or out based on a market swing, take a deep breath and think long-term.
That’s all we have time for. Thanks for watching, and a big thank you to Derek Horstmeyer for his insightful research. Don’t forget to like, subscribe, and follow us on Facebook and X. See you next time.
Disclaimer
You should read the Product Disclosure Statement (PDS) before deciding to acquire the product.
The issuer of units in Montgomery Small Companies Fund (ARSN 635 229 533) (Fund) is the Fund’s responsible entity Fundhost Limited (ABN 69 092 517 087) (AFSL 233045). The Fund’s investment manager is Montgomery Lucent Investment Management Pty Limited (ABN 58 635 052 176, Authorised Representative No. 001277163). Copies of the PDS and Target Market Definition (TMD) are available to download from this page and at https://fundhost.com.au/
An investment in the Fund must be through a valid paper or online application form accompanying the PDS. Before making any decision to make or hold any investment in the Fund you should consider the PDS and TMD in full.
The information provided does not take into account your investment objectives, financial situation or particular needs. You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided and consider seeking advice from a financial advisor if necessary.
You should not base an investment decision simply on past performance. Past performance is not an indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
