When is the right time to buy shares? Clearly, if there was a simple answer to this question, then you wouldn’t be on this website and the world would look very different. As with the future, companies, markets and economies will always be unpredictable.
But, amid much speculation of a “v-shaped” recovery from the coronavirus crisis, and after a decade in which a strategy of ‘buying the dip’ usually worked, many investors will be wondering how they might time their entries and exits to and from the stock market. Do we have a brief window to get in at a market low, or should we await more clarity about the state of global economies before leaping in?
Living in virus time
Like the sharp falls seen at the end of February and the first half of March, the return of bullish sentiment in recent weeks has been volatile, and often one-directional. For some, it will have made for painful viewing. With so many having lost much already, the fear of missing out on the recovery – however real this ultimately proves – can be equally stressful.
Despite this, the recent rebound in risk sentiment has few parallels with economic fundamentals or corporate earnings prospects. Covid-19 infection rates may be peaking in some parts of the world, but for all of the time-stamped epidemiological forecasting, there is no clear path back to anything approaching economic or social normality.
That does not mean investors will never have a roadmap for recovery. In the coming months, there may be a moment when market uncertainties and risks are over-priced. This is most likely to involve the approval of a workable vaccine or treatment, or a scientific consensus that the virus is far less deadly than currently feared.
If any of these scenarios occur, equities are likely to spike higher. Buying in at or just prior to that moment seems like a smart move.
This sentiment appears to be reflected in the views of companies themselves. An astonishing 56 per cent of chief financial officers believe their companies would take less than three months to get back to ‘business as usual, according to a poll carried out by professional services firm PwC.
Unfortunately, such bullish answers tell us nothing about when an investor should buy in. In reality, the PwC survey could be described as little more than group conjecture about a low-probability hypothetical situation.
Indeed, one of the flaws of the idea of ‘timing the market’ is the sheer volume and complexity of factors affecting share prices, even in what we might describe as normal conditions. And even in times of massive fiscal and monetary stimulus, as we are currently witnessing, recoveries are likely to involve set-backs and false dawns.
This all complicates the notion that investments can be timed. And until economic fundamentals start to improve, investors should resist the temptation to confuse ‘when’ they should invest with ‘where’ asset prices sit in relation to their historical record. Share prices only ever reflect a market sentiment; a depressed price does not necessarily provide a cheap entry point.
For more detail on this point, and strategies for investing in the current environment, see:
Coronavirus crash: should I start investing now? – Megan Boxall, March 2020
Timing still matters
But however difficult (or even possible) it is to get your timing right, it stands to reason that timing obviously matters. Anyone who bought in at the FTSE 100’s recent nadir on 23 March would already be sitting on large paper gains. Conversely, if you had put your savings into the FTSE 100 on 1 January this year, you would be staring at some painful losses.
As IC economist Chris Dillow has previously explained, your ability to stomach losses should have a lot to do with the time horizon of your investments. “In the very long run, then, most dips and rallies don’t matter very much,” he writes. “So timing the market isn’t very important.”
However, Chris caveats this with “two big exceptions”: serious bear markets (such as the one we probably find ourselves in) and over shorter periods.
When market timing matters – Chris Dillow, December 2017
Fortunately, Chris has also identified six possible market-timing strategies to avoid these pitfalls. These include using dividend yields as a lead indicator (which is easier to do when companies are paying dividends), buying when prices are above their 200-day moving average, buying between Halloween to May Day, and watching for trends such as foreign purchases of US equities and consumer spending patterns.
In defence of market timing – Chris Dillow, April 2019
However, Chris also notes the “persistent risk that these past relationships that allow us to predict future returns might break down”. Market timing can only work if it's a minority occupation in the best of times. In 2020, things might indeed be different.