Strategy

The Importance of Staying Invested

Oct. 31, 2022

Details:


Trade Idea:

Market timing is a strategy where investors move assets out of longer-term investments in response to short-term market uncertainties. Proceeds raised from selling riskier assets are then placed in cash or cash-like” instruments, in hopes of avoiding the market volatility and then reinvesting when conditions normalize. While this practice may seem easy in theory, particularly when looking at a historical chart, it is extremely difficult in reality, especially as events are unfolding in real time. 

A number of landmark studies have dissected portfolios to ascertain the determinants of portfolio performance. While studies have debated the specific amounts that can be attributed to various decisions in the investment process, market timing routinely comes in as the least critical. Perhaps, the most often quoted study, Determinants of Portfolio Performance” by Brinson, Beebower and Hood (1986), concluded that asset class selection determined the majority of the variation in returns, while market timing explained only a small portion. 

Determinants of Portfolio Performance

Determinants of Portfolio Performance
Source: Brinson, Beebower and Hood, Determinants of Portfolio Performance,” 1986.

Given that timing the market has proven to be extremely difficult, the most critical decision for investors over the long run could be staying invested. While investors may move smaller allocations of a portfolio to cash in order to have dry powder on hand to take advantage of sell-offs, moving an entire portfolio into cash can often have detrimental impacts on the long-term total return of a portfolio. To further illustrate this, we highlight below two portfolios. Both start with an initial investment value of $100,000 and one stays invested over the course in the S&P/TSX Composite Index, whereas the other moves to cash for two months at the market bottom. Being uninvested for only two months, creates a significant difference in the current value of the two portfolios. As a reminder, it is very difficult for investors to time the market exactly at the bottom, especially in real time. 

Timing the Market Can Be Detrimental

Timing the Market Can Be Detrimental


StrategyStarting ValueCurrent ValueTotal Return
Portfolio AStaying Invested$100,000$241,168.06141.2%
Portfolio BMarket Timing$100,000$184,969.8885.0%
Difference-$56,198.18-56.2%

Source: Bloomberg, BMO Global Asset Management.
Portfolio A is invested in the S&P/TSX Composite Index (Between 10/31/2007 and 10/31/2021).
Portfolio B is invested in the S&P/TSX Composite Index (Between 10/31/2007 and 10/31/2021, but is in cash between 03/05/2009 and 05/05/2009).

Investors looking to stay invested may want to look for broad beta ETFs in order to get low-cost, efficient exposure to the markets. 

ZCN
ZCN BMO S&P/TSX Capped Composite Index ETF
  • Provides exposure to the Canadian equity market
  • Tracks the S&P/TSX Capped Composite Index
  • MER of 0.06%
ZSP
ZSP BMO S&P 500 Index ETF
ZSP.U BMO S&P 500 Index ETF (USD Units)
ZUE BMO S&P 500 Hedged to CAD Index ETF
  • Provides exposure to large cap U.S. equity market
  • Tracks the S&P 500 Composite Index
  • MER of 0.09%1
ZDJ
ZDJ BMO Dow Jones Industrial Average Hedged to CAD Index ETF (Hedged Units)
  • Provides exposure to large cap U.S. blue chip stocks
  • Tracks the Dow Jones Industrial Average
  • MER of 0.26%1
ZNQ
ZNQ BMO Nasdaq 100 Equity Index ETF
ZQQ BMO Nasdaq 100 Equity Index ETF (Hedged Units)
  • Provides exposure to the higher growth U.S. equities
  • Tracks the Nasdaq 100 Index
  • MER of 0.39%1
ZEA
ZEA BMO MSCI EAFE Index ETF
ZDM BMO MSCI EAFE Index ETF (Hedged Units)
  • Provides exposure to developed non-North American equities
  • Tracks the MSCI EAFE Index
  • MER of 0.22%1
ZEM
ZEM BMO MSCI Emerging Markets Index ETF
  • Provides exposure to broad based emerging market equities
  • Tracks the MSCI Emerging Markets Index
  • MER of 0.28%1

1 As of October 312022.

Disclosures:

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

The communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

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The Dow Jones Industrial Average Index CAD Hedged is a product of Dow Jones Opco, LLC (“Dow Jones Opco”), a subsidiary of S&P Dow Jones Indices LLC and has been licensed for use.​“Dow Jones®” and Industrial Average Index CAD Hedged are service marks of Dow Jones Trademark Holdings, LLC (“Dow Jones”), and has been licensed to Dow Jones Opco and sublicensed by BMO Asset Management Inc. The funds are not sponsored, endorsed, sold, or promoted by Dow Jones Opco, Dow Jones, and their respective affiliates, make no representation regarding the advisability of trading or investing in such a product(s).

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