Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
A common obstacle to beginning investing is that people put too much value into when to enter the market. But data indicate that it’s better to be invested for a long time than to try to time the market. Here’s three reasons why.
Compounding returns is the bedrock of long-term investing, and its value is often underestimated. When you invest, your earnings generate their own earnings over time. This snowball effect is most potent when investments are left to grow uninterrupted. For example, a USD 10,000 investment in the MSCI USA Total Return Index in 1980 would be worth around USD 1,050,000 in 2024, assuming all dividends were reinvested. This is an annualised return of 11.1%. So if you have a long investment horizon, it’s better to allow your savings to do their thing in the markets rather than trying to pick bottoms and tops or "timing" the market.
“It may not seem like a big thing at first, but the compounding effect over time is significant. So, and this cannot be understated, the most important thing in relation to investing is to get started. None of us are able to time the market anyway,” says Peter Garnry, Chief Investment Strategist.
Apart from compounding interest working in your favour over time, there are several other reasons why time in the market beats attempts at timing market entry. The first – and arguably most obvious – is that timing markets is an incredibly tough thing to do. Professional investors don’t believe they can do it, so you need a certain level of conviction to believe that you can.
“A very important point in relation to the idea of timing the market is that if you miss out on just a few of the good days, your return over time can suffer exponentially,” says Garnry. Also, timing the market comes with the risk that instead of avoiding the worst days on the market, you risk losing out on the best days, which may be a greater disservice to your savings. Consider the following data for the S&P 500 from 1991 to mid-2024:
Investment scenario | Annualised return (%) |
Fully invested | 11.0% |
Missed 10 best days | 8.5% |
Missed 20 best days | 6.8% |
Missed 30 best days | 5.3% |
Missed 40 best days | 4.0% |
The data above show that if you were fully invested throughout 1991–2024 in the S&P 500, you would have earned 11% annually on your investment. But if you missed just the 30 best days, you would have halved your entire return.
“The point is that of course we would all like to avoid the worst days in the markets, but missing the best days is also very risky, and manoeuvring in and out of the market at the right time seems almost impossible. So the most salient approach seems to be staying invested as long as you have a long time horizon,” says Garnry.
Missing the best days is, of course, a weird construct because most rallies, or rebounds, are sharpest when markets have sold off badly. So if you are missing the best days probably means that are you missing the worst days as well.
Another way to understand why time invested is more important than timing investment is by looking at your return since a given year in the past, comparing investing at the high (worst entry) or bottom (best entry) of that year. The table below shows annualised returns in US equities from a given starting year until today (mid-2024) based on the best and worst entry.
Year | Best entry | Worst entry |
1994 | 10.2% | 9.9% |
2003 | 10.8% | 9.7% |
2008 | 14.0% | 10.4% |
2013 | 13.5% | 12.4% |
2018 | 16.8% | 13.1% |
There are several conclusions we can draw. One of them is that in most normal years, the difference between perfect timing and the bad luck of entering at the worst possible moment is only around 1% annualised. Another conclusion is that when you do have a year with big swings or declines, the timing can make a difference, but being able to time the market is extremely difficult if not impossible.
The far more important lesson is that as you stretch out the time horizon to 30 years, the difference between perfect timing and random bad luck is very small. In our case, only 0.3% annualised (as evident from the difference between the best and worst entries in 1994, or 30 years ago). And in nearly all normal cases in which we are building our portfolios over many years at so many entry points along the way from our regular income, any risks related to timing are further diminished.
In general, the differences are so small that as an investor you should not overcomplicate when to invest. It is better to find cheap passive equity index funds and then make a plan for consistently investing your savings. “Unless you get lucky and hit the market at rock bottom, timing means very little because you postpone getting started, waiting for an event that might not happen and miss returns along the way. So instead, spend time finding the right investment for you – preferably at a low cost – and just do it,” says Garnry.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)