Why trying to time the market can cost you dearly

Currently many investors are wondering if it’s the right time in the cycle to buy property.

They’re sensing the changed mood and recognising that the Sydney and Melbourne property markets are on the move again.

But how important is it to get your market timing right?

Probably a lot less important than you think.

New research from the Property Investment Professionals of Australia (PIPA) has found that investors who try to time the market could lose hundreds of thousands of dollars.

Their analysis looked at every capital city market over the past 15 years to determine whether time in the market or timing the market produced the best capital growth. On A Yellow Background, Empty Labels Hang On The Rope. In The Center Is A Small Pink Alarm Clock. Tinted Photo With A Place For An Inscription.

The results show that an investor who tried to time the market could potentially lose nearly $140,000 over the 15-year period.

PIPA chairman Peter Koulizos said most investors simply don’t have the skills or knowledge to expertly select the best markets to invest in over the short-term.

“Trying to time the market is not only extremely difficult for most investors, the transactional costs of buying and selling multiple times, including stamp duty and Capital Gains Tax, eat up a significant chunk of your potential profit,” he said.

“Most people are only thinking of the potential price uplifts when they try to time a market and naively don’t consider the inherent risks involved in such a market gamble.”

The research calculated median house price changes in every capital city over the past 15 years as well as for the three five-year periods within that timeframe.

Timing

The top three performing capital cities over the past 15 years were Melbourne, Hobart and Darwin with median house price growth of between 147 per cent and 106 per cent.

The best capital city between 2003 and 2008 was Darwin at 91 per cent growth; from 2008 to 2013 it was Sydney on 41 per cent; and from 2013 to 2018 it was Sydney and Melbourne on 38 per cent.

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“What the data also shows us is that no market is the strongest for a sustained period of time, with Sydney’s market actually the strongest prior to the most recent price upswing,” Mr Koulizos said.

“Likewise, over the past 15 years, Darwin was the third best performer in the nation – and the best between 2003 and 2008 – even though its market is considered to currently be in a downturn.”

The research considered the capital growth results for an investor who purchased a $400,000 house in 2003 and then simply adopted a time in the market strategy.

The results ranged from capital growth of $588,000 in Melbourne to $324,000 in Brisbane.

However, for investors who tried to time the market but who choose the worst performing capital cities over each five-year period, they could be out of pocket to the tune of $137,701.

“For argument’s sake, if an investor somehow managed to select the best locations each time, sure, they would be ahead by $386,000, yet by simply buying and holding in many other locations their capital growth result would have been better,” Mr Koulizos said.

“On top of that, there is the stress of buying and selling three times in a 15-year period during which time market sentiment and conditions can change dramatically as well.”

Time in the market Dec 2003 purchase price Dec 2018 value 15-year capital gain
Sydney $400,000 $740,000 $340,000
Melbourne $400,000 $988,000 $588,000
Brisbane $400,000 $724,000 $324,000
Adelaide $400,000 $776,000 $376,000
Perth $400,000 $824,000 $424,000
Hobart $400,000 $888,000 $488,000
Darwin $400,000 $872,000 $472,000
Canberra $400,000 $752,000 $352,000

Source: PIPA

 

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Property investing is dogged by dozens of different variables and although many property spruikers attempt to make it an exact science, the reality is, there will never be a ‘perfect’ time to invest or the ‘perfect’ property to buy.

That said, there are some principles that can be applied whenever you consider investing in real estate, to ensure that you are as comfortable as possible and exposing yourself to the least amount of risk.

Earlier this year I recorded a Masterclass –  Is Timing The Market Really That Important For Property Investors? 

In this Masterclass I’ll explain:

  • What happened to property values in the last 4 property downturns
  •  4 conclusions we have drawn studying the last 4 property cycles and
  •  7 lessons you can take away to help you understand how to make sense of the current property market downturn

Please click here and watch this Masterclass as I explain:

 

  • “Perfect” timing has little impact if you hold your investment over the long-term
  • Owning the right assets is critical
  • Time in the market is important
  • No one really knows what’s going to happen to the property markets

 

 

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Michael Yardney

About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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