Fundsmith chief executive Terry Smith has hit out at people trying to time markets.
“When it comes to so-called market timing there are only two sorts of people: those who can’t do it, and those who know they can’t do it,” Smith wrote in a column for the Financial Times.
Using the Dow Jones Industrial Average, he compared a hypothetical scenario whereby an investor used pound-cost averaging to trade daily in the market versus an investor who had perfect foresight and stopped investing when markets peaked, began saving and then resumed investing once markets bottomed out.
The latter approach outperformed by 22% over a 50-year period between 1970 and 2020.
“But think of the time and effort you would have to spend monitoring markets to get those calls just right,” he said. Most people take their money out during or after falls, he said.
“In reality, attempts to implement the second strategy will almost certainly cause harm to your net worth as nobody has perfect foresight. In your desire to time the markets, you will stop investing, or worse, sell and take money out when you expect the market to go down, and instead it goes up.”
He pointed to Brexit and Donald Trump’s election as examples of markets getting it wrong.
“We were told by most commentators that they would not happen, but if they did, the markets would plunge. Not only were they wrong about the events but they were also wrong about the market’s reaction to events. The markets soared.”
