Earlier this year, we discussed the challenges involved in trying to successfully time the market—that is, selling investments before markets plunge or buying before markets go up. The uncertainty across markets this year and the speed of November's rally reinforce the difficulty of such an approach, and highlight that staying invested according to one’s long-term plan secures the best outcome for most investors.

The market timing dilemma

Timing the market is a tempting but tricky proposition. This is due partly to the fact that it appears to be a simple exercise when looking back at historical return charts where market tops and bottoms are clearly visible. The reality is that often things feel very different before an upswing or downswing and there aren’t clear signs of the market’s direction in the moment. Getting out at the right time is hard enough, but getting back in is often the greatest challenge. Once investors feel the comfort of cash, it can be very hard to recommit to an uncertain market.

As markets rise, investors with an excess of cash may feel they missed their chance and that markets are now too expensive, so they had better wait for a pullback before getting back in. Then, when markets inevitably take a breath and decline, investors may feel that they’ll continue to fall further. It doesn’t feel like a good time to buy either.

The waiting game often continues until there is a sense of certainty that all is well again. This approach usually will lead an investor to miss the upswing, which, as we saw in November, can happen quickly and without warning. Now the investor, who once again missed out, feels they should wait for a correction, and the cycle repeats.

Changing sentiment

As much as market moves seem obvious, and even predictable with the benefit of hindsight, this isn’t the reality. Let’s consider some periods in 2023 where sentiment bounced between optimism and pessimism alongside asset prices.

Heading into the year, investors remained cautious with most expecting a recession being a near-term inevitability. Then markets gained momentum through the spring and summer months on the back of excitement surrounding artificial intelligence (AI) and tech stocks, before the narrative began to sour in August. 

At this point, investors seemed to finally accept what central banks had been reiterating—the prospect of interest rates poised to be “higher for longer”—causing bonds and stocks to significantly decline. This was largely attributable to an increase in inflation data in July for the first time in 13 months alongside a strong labour market and economy, causing uncertainty on further progress on inflation.

After this sell-off, a shift to a more positive mood took hold near the end of October thanks to tentative signs that the economy was moderating while inflation also remained in decline. This strengthened the notion that central banks have raised rates to their peak, and increased the likelihood that rates may have room to come down sooner than previously expected. 

At this stage, the term “soft landing"—that is, bringing down inflation and cooling the economy without a recession—began to gain momentum. Markets welcomed the idea of
such a scenario unfolding with both stocks and bonds posting significant returns for the month of November.

By all accounts, a decent year

As depicted in the chart and table below, markets have not delivered smooth returns this year, but that is rarely the case. Despite see-sawing sentiment and maximum drawdowns for stocks and bonds greater than seven per cent, bond and stock indexes have posted respectable returns thus far with a diversified 60/40 portfolio index exceeding 10 per cent.