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Timing the Market vs Time in the Market

Timing the Market vs Time in the Market

  • Allan Mate • Trading Desk Banco BiG Mozambique

The primary equity market is one of the main segments of the financial market where companies typically seek to raise capital with a view to financing the expansion of their activities, for example.

Its dynamics are based on the transfer of savings from savers or investors holding liquidity or capital (individuals, companies, investment vehicles, etc.) to entities in need of such liquidity or capital, turning these investors into new shareholders.

In this market, the predominant investor profiles are risk-taking and risk-accepting. There may exist within this group investors with a moderate risk profile, who typically seek a balance between capital preservation and profitability and generally present a relatively balanced portfolio consisting of equity (such as Shares) and debt (Bonds) instruments.

On the other hand, an investor with a riskier profile, i.e. with less risk aversion, tends to prefer a portfolio with greater exposure to riskier investments, be it equities, investment funds, derivatives, commodities, etc.

A principle widely held by several investors and stock market experts is that, to ensure a good portfolio management, it is more important the time the investor is investing in the market – “Time in the Market” – and not so much seeking the right time to make the investment or disinvestment decisions – “Timing the Market”.

There are several studies showing that a reasonably diversified equity portfolio, over the long term, will have higher returns compared to poorly diversified portfolios actively managed to identify speculative opportunities by regularly changing positions.

In more developed economies, more sophisticated investors, who manage large sums of funds (such as pension funds, investment funds, sovereign wealth funds, etc.), tend to participate in the market in a more active and informed way, making their decisions based on fundamental analysis (analysis of financial statements, economic indicators, and others) and technical analysis (based on graphical analysis of the price and volume behaviour of financial instruments).

It is more important the time the investor is investing in the market – “Time in the Market” – and not so much looking for the right time to make the investment or disinvestment decisions – “Timing the Market”.

It should be noted that this form of investing is based on the premise that markets are not efficient, i.e. assets do not reflect fair value, triggering arbitrage and value capture opportunities.

However, this knowledge is usually achieved through active participation in the market for long periods of time and involves a deep understanding of the different market cycles.

According to statistical information from various markets, the performance of major equity indices such as the North American S&P 500 index, in periods of financial crisis, typically records large losses in value.

However, in post-crisis periods, the same indices tend to recover the value lost and appreciate above pre-crisis levels, thus demonstrating that in cumulative terms, over the long term, these assets generate positive returns. For example, an investor who had invested in the S&P 500 index over the period 2011 to 2022, in which the index went through a period of crisis with the covid-19 pandemic, in which it depreciated by more than 30%, would have had a cumulative appreciation of more than 250%.

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Timing the Market” behaviour is based on constant exchanges of positions and changing the type of assets held by the investor, based on future market forecasts or estimates, sometimes short term, as a way of generating capital gains.

However, it has been proven that in developed markets this strategy hardly works, as nobody can predict if a certain moment is the ideal time to take a position and if, in the short term, the price of a certain asset will rise or fall. In this sense, the advice of financial theory to an investor who wants to accumulate wealth in the long term with a controlled exposure to risk, is simply to invest early and regularly, thus increasing the time horizon of the investment and reducing the risk of market-timing, trying to hold a diversified portfolio of assets, with exposure to asset classes with risk, in order to increase the expected return.

At the same time, investors must remain alert and informed of economic, financial, social and political events in order to better understand the factors impacting the markets and make increasingly informed decisions on their transactions. Locally, the Mozambican capital market is in a development phase, and the volume of transactions is still dominated by debt securities, mainly treasury bonds. The equity market still shows little depth and does not display the dynamism of its counterparts, with a limited number of listed companies and reduced liquidity, not yet allowing full advantage to be taken of a strategy of composing a well diversified portfolio with exposure to various securities.

However, this scenario is expected to change as the market develops and, with the growth and diversification of the economy, more and more companies will enter the capital market, seeking to raise capital from Mozambican savers and investors.

At the same time, investors must remain alert and informed of economic, financial, social and political events in order to better understand the factors impacting the markets and make increasingly informed decisions on their transactions. Locally, the Mozambican capital market is in a development phase, and the volume of transactions is still dominated by debt securities, mainly treasury bonds. The equity market still shows little depth and does not display the dynamism of its counterparts, with a limited number of listed companies and reduced liquidity, not yet allowing full advantage to be taken of a strategy of composing a well diversified portfolio with exposure to various securities.

However, this scenario is expected to change as the market develops and, with the growth and diversification of the economy, more and more companies will enter the capital market, seeking to raise capital from Mozambican savers and investors.

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