The importance of “time in” the market over “timing” the market

Equity markets have been on a rollercoaster ride thus far in 2025, largely thanks to one man: President Donald Trump, and his somewhat idiosyncratic views on tariffs and trade. The best measure of this is the CBOE Volatility Index, or VIX, which represents investors’ expectation of volatility over the coming 30 days – by David Batchelor

Having been below 15 in December (a VIX of 10-15 suggests an environment of very low volatility with market sentiment as complacent or calm), the reading spiked as high as 60 (50+ is deemed as extremely high volatility with market sentiment as ‘crisis mode’) in the aftermath of “Liberation Day” on 2 April, when the president announced America’s series of reciprocal tariffs. Equities (as well as bonds and currencies) saw historically extravagant daily moves. The S&P 500 shed 4.8% on 3 April and 6.0% on 4 April, one of the worst 2-day falls in its history.

In such conditions it would easy for the managers of investment trusts to do the equivalent of burying their heads in the sand, namely selling much of their portfolio and hiding in cash. Easy – and also wrong. For the simple reason that the key to investment success is not timing the market (notoriously difficult, even for experts) but instead time in the market. If, on 5 April, an investor had decided they could take no more and cashed in their holdings, within four days they would have missed the biggest 1-day rally since 2008, as the US market rose 9.5% in the immediate aftermath of Trump pausing the tariffs for 90 days. The market is of course still down year-to-date, but those investors who have ridden out the volatility rather than panicking are best placed to achieve their objectives over the long term.

To pick just one other of many other examples from recent market history: the start of the Covid lockdowns in that scariest of months, March 2020. Investors reacted with understandable panic to the idea of a shuttered world economy and stock prices plunged. But again, any manager that responded to these falls by selling at the market low that month would have missed a rally to the end of the year of 68% for the S&P 500, as authorities unleashed unprecedented fiscal and monetary stimulus against the impact of the virus.

This time in over timing rule is not just anecdotal but is borne out by the long-term data. The average annual total return of the S&P 500 for the thirty years to the end of 2023 was 9.9%. Removing just the 10 best trading days reduces this to 5.6%; removing the 40 best days sends the return negative (Source: JP Morgan Asset Management, Guide to the Markets 2024). Perhaps most shockingly, missing just the best 10 trading days since 1926 (before the Great Depression!) would have halved your overall returns.

This all provides an important context to one of the key advantages of investment trusts, and collectives investing in general. With some notable exceptions at the low end of the risk spectrum, the managers of most trusts remain close to fully invested throughout the market cycle. This is partly due to the not unreasonable assumption that investors are paying them to invest in-line with their mandate, rather than hold cash. But it is also due to an understanding of this market history. And over time shareholders in those trusts reap the benefits.

The managers at Temple Bar (TMPL), for example, recently told their shareholders that “Even though the short term is extremely uncertain, and things may well get worse before they get better, we are optimistic that (our) approach will remain an effective counterbalance to uncertainty, which should ultimately prove rewarding to those with the discipline to stay the course”. In their spring newsletter, Alliance Witan (ALW) even reproduced the Nathan Rothschild quote that “The time to buy is when there’s blood in the streets”.

More specifically, many of the most successful trusts over time are those that focus on bottom-up investing, identifying the quality companies and opportunities within their universe to hold over the cycle, rather than being preoccupied with top-down concerns or geopolitical and macroeconomic distractions – in other words ignoring the noise. Rather than wasting energy on trying to deconstruct the latest presidential posts to Truth Social for nuggets of information on the direction of tariff policy, they instead remain resolutely focused on their investments. Thus they ensure they are investing capital in quality companies and opportunities that will deliver for shareholders over the long-term, no matter the short-term market gyrations. Or as Caledonia Investments (CLDN) puts it: “Our investment approach is grounded in the belief that long-term capital growth is best achieved through investing in high-quality companies with strong market positions and robust fundamentals”.

Given their structure, trusts may of course have to reckon with a widening of the discount of their share price to NAV during periods of market turmoil – sadly something investors are all too familiar with recently. However, this can present an additional opportunity to investors. Just as quality companies can see unjustified falls during periods of market stress, so better trusts can be unfairly punished. But this can present an opportunity to savvy investors who are confident of these discounts narrowing as market conditions normalise.

There are many useful investment maxims around. But, in times of market turmoil, none better than one of the oldest: remember that it is time in the market that counts, not timing the market.

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