Timing the market can take on many different forms, but we’ve all done it at some point in our lives, even me. Sometimes the market is at an all-time high and we feel there is no way it can keep going up for much longer. We decide to wait for that market correction before investing. Sometimes there is turmoil in the world, markets are falling, and we want to wait to invest until that volatility subsides. In the moment, it always seems to feel obvious what the correct “market timing” strategy is.

Unfortunately, in the real world, timing the market is extremely difficult to do. As a firm of investment professionals, we recently tried to artificially time the market during a team Zoom…and we failed miserably. We used the website: Try to Time the Market to test ourselves. The website simulates a random 10-year historical return sequence from the US stock market. Over those ten years, you get one chance to sell and go to cash, and one chance to buy back into the market. You will beat the market return if you pick the right time to get out and get back in. Sounds easy, just sell when the market is at a high, and buy when it’s at a low.

As a firm, we only outperformed the market 40% of the time. Meaning 60% of the time, we would have been better off if we had just stayed invested the entire 10-year period. To make matters worse, when we did beat the market, it was only by a few percentage points, but when we lost to the market, it was usually by 50+%.

The game only takes a minute to play. Give it a few tries, and see how you fair.  We’d love to hear how you did.

Why did we fail at trying to time the market? On average, the market goes up a few hundredths of a percent every day. This means that each day your money is out of the market you are losing out on that potential gain. If the market actually went up a tiny bit every day, no one would ever think to try and time it. However, the volatility of the market makes trying to time it so enticing. If you just avoid some of those bad days, months, or years, it can make a drastic difference in your net wealth. The trouble is if you miss out on those great days, months, or years, it can also make a drastic difference in your net wealth. Given, on average, that the market goes up every day, you are better off not trying to play the timing game and simply stay invested. 

You’re better off taking the long view.

It’s no secret that 2022 was challenging for both the stock and bond markets. Stocks ended the year down 18%*, while bonds were down 13%**. How did we do in 2022? Thanks to our compliance group, all we can say here is that our strategy of investing in low-cost, diversified strategies that tilt toward small, value, more profitable stocks meaningfully outperformed the S&P500 index in 2022. 

As much as I would like to pat our firm on the back, you know our refrain: one year is essentially meaningless when it comes to investing. Due to the volatility and randomness of markets, any strategy can outperform or underperform in any given year. Our strategy certainly does not outperform every year and can even underperform several years in a row. To have real confidence in an investment strategy’s reliability, investors must look at how it performs over decades, not just years.

To see how we measure up over the long haul, we go back as far as we can, looking at the investments we recommended each year (and own ourselves) to see how our philosophy has held up over time. Our favorite chart compares the value of a hypothetical $1 invested in the year 2000 to 2022. Some of you may be familiar with Paul Harvey’s famous line regarding “the rest of the story.” Shoot me a note at zenz@hillinvestmentgroup.com for the details and the rest of the returns story. We can share how our recommended equity strategy has performed over time and the magnitude of the benefit of taking the long view.

If you have been a client for a while, you have likely seen the benefit of a long-term, evidence-based strategy show up in your portfolio.  If you’re not a client, ask yourself why.  Then pick up the phone and call us. You can schedule a call with me anytime here.  

One of the most memorable fairytales of my childhood was the story of Hansel and Gretel. In this tale, an evil witch lures two children to her house made of gingerbread with the promise of candy and sweets, only to try and eat the unsuspecting kids. This story was namely memorable due to the nightmares that it caused me, but I never forgot the lesson that if something sounds too good to be true, it probably is. Investing in Private Equity (PE) reminds me of this story. Private Equity managers lure investors in with the promise of exclusive access to uncorrelated returns and higher performance reserved only for the ultra-rich. One only needs to dive a little deeper to realize that many of these claims aren’t what they appear to be. Lack of pricing, misleading return numbers, high fees, and illiquidity make this asset class less than desirable.

	Lack of Price Transparency	PE investments are only priced once a quarter. These prices do not come from actual trades between willing market participants, but rather from PE managers claiming what they think they could sell a business for. Only posting prices once a quarter, and not having transparency on where those prices came from, makes the returns of PE appear smoother and less risky than they truly are.
	Internal Rate of Return (IRR)	PE managers often advertise their stellar returns via IRR numbers. For example, firms like Apollo and KKR have since inception IRR returns of 25-35% a year! Who wouldn’t want to invest in a firm that has returned 30% a year for decades? Unfortunately, this IRR number is not comparable to the time-weighted returns you see from public markets. Early success on low asset values can skew the IRR number to look higher than the return most investors experienced. Based on the amount of assets Apollo and KKR have managed over the last few decades they would have 2.5x more assets than they currently do if they had 30% year-over-year returns since inception (not including any additional inflows from new clients). Using more comparable return calculations you find that PE returns are very similar to those of public markets.
	High Fees	All-in, PE fees are ~6-7%/year. This is made up of mostly a management fee and a performance fee. Management fees are usually around 2%, but some of the more successful managers charge even more. Performance fees are usually around 20%, charged on top of the ~2% management fee. As a point of comparison, the public equity funds we use in our models today charge between 0.17-0.39% management fees (8x cheaper), and no performance fees. Ultimately the economic rents of skilled PE managers accrue to the managers themselves, not the investors. PE is often referred to as the “Billionaire Factory” – for managers, not investors. From 2005 to 2020, 19 new billionaires came out of Private Equity alone.
	Illiquidity	PE also has the nasty feature of illiquidity. Once you decide to invest, your money might be tied up for 5-10 years, meaning you can’t get it out if you need it. This lack of flexibility is a large drawback to this style of investing. You may be willing to make this sacrifice for the prospect of higher returns. But as already discussed, because of the high fees there is little evidence that PE can reliably provide higher returns.

This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies.  Investments involve risk and, past performance is not indicative of future performance.  Consult with a qualified financial adviser before implementing any investment strategy.