Was this the year to be an active fund manager?
The speed of market movements was particularly notable. In the US, the S&P 500 index fell by 33.79% in just 23 trading days from 19 February, subsequently growing by 45.09% in the following 53 trading days, going on to end the year up 18.40%.
Understandably, investors may interpret a year of such rapid changes as one that provides an argument for active investment management. It’s true that such fluctuations over such a short period can provide opportunities for a more active trading style. However, unfortunately it’s circumstances such as these that also highlight its shortcomings. With high conviction investing, the risks of misplaced conviction can be all too damaging; rapid market movements also reinforce the dangers of the notoriously tricky practice of attempting to accurately time ‘buy’ and ‘sell’ decisions.
It’s difficult to argue against staying invested through periods of volatility, 2020 emphasising just why trying to time markets in volatile periods can be more perilous than advantageous. Figure 2 highlights the points at which an investor in some of the major global stock markets over 2020 would have lost out on more than 2% of investment growth by not participating for just 2 days. When trading in and out of investments and making those active timing decisions, a period of 2 days or more out of the market is common. The chart shows just how frequently over 2020 such a period out of the market would have resulted in notable missed growth (up to 16%) and therefore, how fraught with danger timing decisions can be.
Figure 2: Two-Day Non-Market Participation Missed Growth (>2%) – Selected Global Equity Markets 2020
These events compound the message that extreme market volatility shouldn’t change an investor’s long-term objectives.