"Timing" the market can be more important than "time in" the market

Most people are familiar with the saying that “time in the market is more important than timing the market”. It is very true that holding a quality investment for many decades will mask imperfect timing. However, for some asset classes/investments, timing can be very important.Most markets move in cyclesMost people understand that markets move in cycles. To generalise, an asset class can be over-valued (particularly during a boom cycle), under-valued (after a bust cycle) or fairly valued.If you had have invested in the US tech index (NASDAQ) in November 2021 you would have lost about 30% to date. This is a lesson in poor timing. $100 invested would now be worth $70. An investor needs a 43% return just to get back to $100 again (breakeven). It’s worth noting that every fundamental indicator highlighted that the NASDAQ has been overvalued for some time. Of course, a bull market can last a lot longer than anyone can anticipate which invites people to ignore these fundamental indicators.Mean reversion: what goes up, must come downIf we acknowledge that most markets move in cycles, then it is obvious that we should invest in undervalued or fairly valued asset classes and sell asset classes that are overvalued. Taking this approach leverages the power of mean reversion as I explain in this blog.Investment-grade property has much flatter cyclesIt is important to define what I mean by “investment-grade property”. Investment-grade property is an asset that has produced a solid historical capital growth rate, underpinned by a strong land value component and scarcity. As such, investment-grade property benefits from perpetually strong demand at a level that exceeds supply. These assets are generally located in well-established, sort after, blue-chip suburbs.Property is a lot less volatile than shares – about half the rate. I suspect there’s two reasons for this. Firstly, property is a necessity. We all need a roof over our heads. It is not a discretionary asset, like shares are. Secondly, due to high transactional costs (agent fees, stamp duty, etc.), property isn’t traded (bought and sold) in the same way shares are.For example, the volatility of the median houses price in Melbourne since 1980 is 9.1%. The average capital growth rate over that period was 8.3% p.a. Therefore, two-thirds of the time investors should expect the annual growth rate will range between 0.8% and 17.4%[1].That compares favourably to share markets which tend to have volatility rates of 18-20%. Therefore, two-thirds of the time share market returns will range between -11% and +28% - a much wider range.Timing the property market is less importantThis chart sets out long-term growth patterns for property in each capital city. It is noteworthy that property tends to eb between two cycles being growth and flat. Of course, it would be great if you could accurately pick when each cycle will begin and end, but you can’t. It is very difficult (read impossible). Markets cycles can last longer than you may expect. For example, Melbourne’s apartment market is a good example of this – it’s been flat since 2010.My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at [email protected]. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.