Many investors try to ‘time’ their investments into the strongest performing asset class of any given period to capture the best returns. However, the key to successful investing is time, not timing.

The perils of market timing

While you might be able to pick the future performance of a sports team based on last year’s performance, this is often because you know the team, you know the competition and the environment doesn’t change much (and even then it is often hard). However, with investment markets, it’s more difficult. Factors such as interest rates, exchange rates, commodity prices and consumer spending all come into play at a global and local level to influence performance. As a result, last year’s winner can easily become ‘today’s loser’.

Some investors can get it right some of the time. But more often than not, ‘market timers’ sell when a market is low and are out of the market when the inevitable rally occurs. In this way, market timing exposes you to the very risks you are trying to avoid.

Example - From best performing asset class to worst, within a year

Australian shares
Best asset class in 1991 (34%) - Worst in 1992 (-2%)
Best asset class in 1993 (45%) - Worst in 1994 (-9%)
International shares
Best asset class in 1995 (27%) - Worst in 1996 (7%)
Best asset class in 1999 (17%) - Worst in 2000 (3%)
Listed property
Best asset class in 2006 (34%) - Worst in 2007 (-8%)
Cash
Best asset class in 1994 (5%) - Worst in 1995 (8%)

Source: Datastream. Best and worst selected from Australian shares, International shares, Australian listed property, Australian fixed income and cash.

Asset classes

Shares are one type of ‘asset class’. Other types include property, fixed income and cash. Each of these asset classes have different risk/return profiles. Generally income assets (like fixed income and cash) can be less risky than growth assets (such as shares and property).

Shares are one type of ‘asset class’. Other types include property, fixed income and cash. Each of these asset classes have different risk/return profiles. Generally income assets (like fixed income and cash) can be less risky than growth assets (such as shares and property).