Investors that try to time the market by investing and disinvesting in unit trusts without a predetermined strategy are likely to be disappointed by their returns.

This is according to Barry van Zyl, quantitative analyst at acsis, independent investment consultants, who says, "Recent research undertaken by acsis looked at the effect of timing decisions on returns achieved by South African unit trust investors over the long term.

Timing the market

"We found that over the past 30 years the average performance of the unit trust industry was 12.7 percent per annum. By comparison, the average investor only received an average annual return of 7.4 percent. That equates to a difference of 5.3 percent per year, which compounded is a significant relative underperformance."

By way of example and excluding costs, R100 000 invested over five years with an annual return of 9.4 percent will give the investor about R157 000 at the end of the period (57 percent return). The same amount invested at an annual return of 4.1 percent (9.4 percent – 5.3 percent) will only give the investor R122 000 after five years (22 percent return).

Why the discrepancy in performance? According to Van Zyl, although in the long run most unit trust funds do well, investors typically try to time the market by switching to funds with the highest returns at the time or selling out of funds that should be regarded as long term investments.

The research highlights an important issue: any investment should be made as part of a long term financial plan based on the individual investor’s individual financial needs.

Invest and disinvest

Many people would ask exactly how it is possible that investors underperform the funds they invest in. Surely the performance of a fund is equal to the aggregate performance of the underlying investors?

"Not so," explains van Zyl. "Investors, whether they are aware of it or not, can dramatically influence their returns through investing and disinvesting, even if they move money only from under the mattress to a single unit trust and vice versa.

"For example, investing a sum of money just before a market boom, and then disinvesting an amount just before a market downturn, could, depending on the extent of market movement and sizes of cash flows, increase an investor’s experienced return a great deal. Sadly, the reverse is just as true."