What would the worst investor in the world do right now?

This is a refresh of an article that we originally published on Endowus Insights in October 2018 and was republished by The Business Times.

Markets are close to all-time highs despite uncertainty around Covid-19, trillions of dollars being printed to keep capital markets and companies afloat, a once fintech darling (Wirecard) being struck with billions in missing money, a once travel staple (Hertz) filing for bankruptcy, and many more dramatic events unfolding every day.

As restaurants open and we see our friends for the first time in a couple of months, the markets and the age-old issue of market timing will undoubtedly come up in conversation.

We have just been on a serious ride. Using the MSCI World Index, which tracks global developed markets, as an example: In a matter of months we went from mid-February all-time highs, down over 35% in just over a month, and now back up almost 40% from the lows. We are now just under 10% less than where we started.

To put this into context, that is an over US$14 trillion swing in the value of the companies in this global index.

Friends, family, grandparents, cousins, and clients are all asking: Is now a good time to invest? Should I take some money off the table? Aren't we due for a huge correction? Aren't the markets being irrational?

What if you invested just before every market crash?

No one wants to be the guy that invests right at the peak only to watch his money tumble for the next few days, weeks, or even years. We all think we are smarter than that.

Meet Bob, the investor we all try not to be. He's the worst market timer in the world and only invests right before the market crashes by 20% or more.

• He invested $100,000 in March 1973, only to see it lose over 40% with the oil embargoes.
• After 15 years of saving and regaining his confidence, he invested $100,000 in August 1987, only to watch the markets dive 20% with Black Monday for no seemingly good reason.
• Sworn off investing, he sits out the next 13 years, witnessing one of the great bull runs of our time culminate in the rise of the dot-com era. He invested another $100,000 in December 1999 at the peak of the bubble, only to see the markets go down by 46% over the course of a few years of terrible events such as the terrorist attacks of 9-11 and the start of the war in Iraq.
• Bob is now near retirement. He gets a lifetime service award of $100,000 from his company, which he invested in the stock market in September 2007, just before the subprime mortgage crisis sent stock markets down over 50%.

The worst market timer would still have done all right

At the bottom of the crash, Bob looked at his account, to see a wonderful surprise of a return of 290% on his $400,000 investment, equivalent to $1,565,787, or an annualised internal rate of return of 6.33%.

Continuing Bob's fate as the world's worst investor, he did not invest again until the onset of Covid-19. In December 2019, Bob invested another $100,000, only to see his investment tumble over 30% by the end of March 2020.

If Bob took all his money out at the end of March 2020 when the markets were near their bottom, he would have $4,927,463.

If he held on until the end of May 2020, he would have $5,729,804, or a return of 1,332% on his $500,000 investment, an annualised internal rate of return of 7.93%. For reference, if he had instead invested this same money in an account earning a guaranteed 2.5% (equivalent to the current CPF Ordinary Account rate), he would only have $948,402.

Bob wasn't a bad investor after all. He saved diligently and never panicked, which allowed the power of compounding to work for him. He had been using the buy-and-hold strategy for his investments all that while — and it paid off.

In fact, Bob did a lot better than many of us. According to JP Morgan's Guide to Markets, the average investor had a 20-year annualised return of 1.9% as of end-March 2020, likely due to speculation and poor investment behaviour.

Market timing is the holy grail of money-making — who doesn't want to buy low and sell high? Unfortunately, it is impossible to get it right consistently enough to beat the market with any certainty.

Read more: Rational investment strategies to win in a tumultuous market

Staying disciplined, passively diversified, and rational

The headlines are scary. The "gurus" and bankers have all sorts of predictions on what markets will do. The fact of the matter is that markets are constantly consuming known information and giving us the latest prices based on the collective wisdom of all of its participants.

Markets will decline. But will they go up 30% before they next pull back by 20%?

Will you have the discipline to put money back to work when it falls by a certain level, even if everyone else is taking money out? Did you have the discipline to put money to work in March 2020 when markets were down by 30%?

Worrying about not investing at the peak of the market is distracting you from what you should really be thinking about: positioning yourself in the markets for the long-term by buying and holding your investments to have the greatest chance of success in reaching your goals.

This means:

• Staying passively diversified across sectors and geographies,
• Not trying to time the market,
• Making investment decisions at a risk level suitable for your goals and your behavioural inclinations, and
• Keeping your costs low and aligned.

Just for the sake of comparison, the MSCI World Index from January 1970 to May 2020 had an annualised USD return of 8.57%, equivalent to a total return of 6,243%. In Singapore dollar (SGD) terms (given the SGD appreciation over the period), this is an annualised return of 6.90%, equivalent to a total return of 2,794%.

Maybe the investor who chose to invest at the worst times isn't actually the worst investor after all, especially if they stuck to their decision in the long run. They would just be a disciplined investor making the most of the buy-and-hold strategy to reap the long-term benefits of markets.

It can be heart-wrenching to see your investments in negative territory but know that, like Bob, you will be compensated for the smart risks you take in the long-run.

Ending with one of our favourite quotes by the founder of one of our favourite fund managers,

"You've already paid for the risk, so it might be good to stick around for the expected return."
— David Booth, Dimensional Fund Advisors founder

Stay safe. Stay invested.

Read more: As we test market lows, remember these three important things

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