Han Dieperink: The best time to get on board
This column was originally written in Dutch. This is an English translation
From a rational point of view, the best time to invest is always today. Staying in the market beats trying to time the market. But investors are, after all, not rational beings.
By Han Dieperink, written in a personal capacity
Every investor asks themselves at some point what the best time is to get started. The honest answer is so simple that it almost sounds unsatisfying: the best time is now. Study after study shows that time in the market is more important than market timing. Those who invest their entire capital in one go achieve a higher return in the long term than those who try to time their entry perfectly. The reason is simple: markets rise more often than they fall, and every day spent out of the market is a day without a return.
Markets may well be efficient, but individual investors are not. Humans have an almost irrepressible tendency to do exactly the wrong thing. At the market peak, when prices have been rising for months and everyone is talking about it, getting in feels like the most logical decision. At the bottom, when the newspapers are full of doom-and-gloom scenarios, getting out seems like the only safe option. Greed is simply a stronger emotion than fear, and investors have no problem with risk, as long as it doesn’t cost them money. Fear comes and goes, but the allure of rising prices is almost irresistible.
An investment in the index is, rationally speaking, the best solution for most investors. By acting as a free rider and piggybacking on the efforts of active investors who drive prices, costs are saved and the market is tracked without expensive management fees. But emotionally, it is precisely such an index investment that poses a threat to returns. Because when the market falls, you know for certain that your investment will fall too. There is no fund manager to reassure you, no alternative strategy to offer hope. Then the temptation grows to step aside for a while, waiting for better times. And when enthusiasm returns to the stock market, it is temptingly easy to get back in with that same index fund. The result is predictable: getting out too late, getting in too late, and a return that consistently lags behind the index one originally intended to track.
Quantitative investors succeed in capitalising on this behaviour. Through factor investing, they systematically exploit the mistakes made by emotionally driven investors. Thanks to artificial intelligence, this takes on a new dimension. Algorithms invest based on value, momentum, quality, low volatility and size, and they do so without being hampered by greed or fear. They constantly capitalise on the stream of buy and sell decisions made by people who think they can time the market. Whereas the emotional investor buys at the peak and sells at the trough, on the other side of that transaction there is increasingly often a machine doing exactly the opposite.
The best time to get in remains today. But anyone who knows themselves and realises that emotions will eventually take over would be well advised to outsource their investing to a party that can follow that rational path. Because ultimately, the greatest risk to returns is not the market, but the investor.