Time in the market versus timing the market

There is an old investment adage that says “It’s About Time in the Market, Not Timing the Market” and certainly the action in financial markets over the last three months does add some credence to this. A distant memory now, the sell-off that began in September and intensified in mid-October saw the major equity market indices fall sharply. There was also a flash crash in the US Treasury bond market whereby we witnessed a jaw dropping 35bps drop in the 10-year US treasury yield in minutes. The CBOE Volatility Index (VIX), a key measure of market expectations of near-term volatility and termed the ‘fear index’, spiked to 30.88, up from 12.03 on September 18^th.

Still, that was then, and this short term blip has been erased after the world’s major central banks helped reverse the panic sell-off with some words of reassurance followed by an extra dose of monetary policy stimulus. Equity markets have bounced back spectacularly from the lows of mid-October, while volatility has fallen back near the record low. In Europe, the German DAX equity index has jumped over 19% to recoup all of the losses incurred while in the US, the S&P 500 is up over 11% and back at a new record high. Japan’s Nikkei 225 index is up 20% over the same period, to a 7-year high.

As I wrote in my October 20^th commentary, “The reality is that over the long term (greater than 25 years) these market moves look much less frightening…Equities over the long term have been the best performing asset class, but that comes with the type of volatility we have seen in recent weeks.” In other words, long term investors wanting to participate in this return potential have to be willing to accept the volatility and uncertainty that comes with their ‘time in the market’.