The cost of market timing revealed

UK INVESTORS are losing an average of 1.2 percentage points a year because of market timing errors, according to new research from Cass Business School.

The study, which was compiled by Andrew Clare and Nick Motson at Cass Business School using Investment Management Association (IMA) data from 1992 to 2009, shows investors chase returns by investing more money following periods of strong market performance and withdrawing less following periods of weaker performance.

This poor market timing has resulted in a return 20 per cent lower than could have been achieved from a simple buy and hold strategy over the same period.

Investors buying global equity funds fared the worst, underperforming an equivalent buy and hold strategy by 2.27 per cent a year while investors in Asian equity funds lost a 0.6 per cent a year. Investors in bond funds performed better than those investing in equities, generally not suffering market-timing losses over this period.

The research shows institutional investors did not suffer similar market timing losses.

Andrew Clare, professor of asset management at Cass Business School says: “Our results are consistent with similar US studies of retail investor behaviour. The message from both sides of the Atlantic is clear: retail investors would be better off not trying to time the market.

By trying to time the market for short-term gains or capitalising on current trends, many investors have lost out in the past.”