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Financial Literacy Friday: Market Timing

Welcome back to another edition of Financial Literacy Friday and today I wanted to discuss a financial concept as opposed to a specific term.  I have talked before about market timing, but I still get the question of “which stock is going to hit next?” so I wanted to spend more time addressing how futile it is time the market.  To further that effort I wanted to look at trying to time market segments as well as investments in different countries’ markets. Let’s start with market segments.

Market Segments

There are some people who say that you don’t need to pick winning stocks, you just need to pick winning market segments, such as emerging markets, small companies, large companies, or any other segment.  Unfortunately, regardless of what segment they are praising the truth is that you can’t know which market segment will outperform year to year. Last year, it was Emerging Markets. The year before it was US Small Cap Value and emerging markets were near the bottom in terms of return.  There are no sure bets when you’re talking about market segments as what’s great two years ago could be near the bottom last year and back near the top or in the middle this year. Implementing a broadly diversified strategy is the most effective way of capturing returns from the segments that do well while making sure you’re not missing out on possible returns.  Over the long term, markets tend to rise so being able to take part in higher returns allows for you to absorb the losses of the underperforming segments and still come out on top. However, perhaps someone say “well, yeah, market timing is too difficult, that’s why we focus on investing in countries with strong returns!” so let’s look at country returns.

Global Equity Returns

Hopefully you should see where this is going because it’s the same picture when you look at global returns.  Which countries outperform is random, just like the market segments, so trying to tailor a strategy around getting specific global returns is also futile.  There are some people who also think that because the US is such a big part of the global economy if they park their money in US funds that they’ll be able to capture the best returns.  However, the US has been the top returner just once in the last 20 years and that was in 2014. Want to know that countries that have been the top returner more often than the US? If you guessed Austria, Finland, Sweden, and New Zealand then you win a prize.  Many of these countries don’t make up a huge part of the global economy and most people wouldn’t think to invest in these markets if given the choice. The point is that just like market segments, global equity returns are random and by trying to time the market even at the country level you’ll likely end up losing out.  Having a globally diversified portfolio allows you to capture the returns of the outperforming countries while mitigating the losses from holding all the countries. Sound familiar?

I know this is a well-trod subject and that I’ve addressed it before, but until I stop getting questions about how I’m planning on timing the markets for a potential client, I’m going to keep putting this information out there.  If you have questions about market timing, or want to look at some more broadly diversified portfolios, send me an email and we can walk through it together.  


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