The Cost of Timing: How Active Investors Missed the Market Recovery

We have all just lived through a very interesting time which shows the benefits of a buy-and-hold approach compared to actively trading your investments.

When Donald Trump unleashed his package of liberation day tariffs on April 2, he also ushered in a rapid-fire correction of up to 10% of losses on many global share market indices.

Since then, world markets have staged an incredible recovery, with both the US and Australian share market indices now trading around record levels.

So how would an active investor have dealt with this market reaction and rapid recovery?

Active investors cut losses – then what?

If they were lucky, they may have been able to sell before the full scale of the losses was brought to book.

However, it is highly unlikely that they would have had the inclination or the gumption to buy back into a market that they had just sold down.

Instead, it is more likely that they would have sat there expecting market carnage to continue, with dreams of buying back in when it hit a new low.

Research shows the real cost of trading

New research by Morningstar is the latest in a long line of research that shows that a buy-and-hold approach is superior — often because markets can rise quickly and unpredictably when many people don’t expect it.

New research by Morningstar backs up the long-term buy-and-hold approach, showing that the average investor would be $213,964 better off by doing absolutely nothing rather than trading through periods of market turmoil.

The research looked at a 30-year-old investor who invested $100,000 and considered what happens by the time they retire at the age of 67.

By not switching in and out of investments, the buy and hold investor ended up an impressive $213,964 ahead, simply by resisting the temptation to try to time markets and trade volatility.

Real investor data shows the benefit of holding firm

Using a decade of actual Australian data, the research showed that investors who trade get an actual return on their investment that is on average 0.4% less than the underlying fund’s headline return.

In contrast, the buy and hold investor managed to capture the entire total return of the funds or ETF’s and so missed out on the gap that actual investors made.

The $213,964 saving assumes that the underlying funds have a headline return of 7.9% a year, which is the projected annual return from Australian equities (including franking credits) based on 20 years of its research.

If someone had simply held their investments without contributing any additional money, their $100,000 would grow to $1,666,454.47 by the time they reached 67.

But if they tried to time purchases in and out of those funds, their return would reduce to 7.5% a year, the Morningstar research shows.

That would produce a total return of $1,452,490.09 at age 67.

Missing a few strong days makes a massive difference

The difference can also simply be a matter of days, with missing the ten best days of share market performance over ten years being enough to make a massive difference.

Missing the 20 best days—which often occur immediately after sharp falls—was enough to be 50% worse off in returns over ten years.

The research also showed that Australia’s superannuation sector is a massive benefit for us, with the average gap between the investment and investor returns in a global Morningstar study in 2024 reaching 1.1%, compared to Australia’s 0.4%.

It really is one of the few examples of where being hands-off or even lazy about investments is a winning strategy.

We all dream of timing investments perfectly to avoid losses and maximise gains, but the real-life data shows that the exact opposite is what happens when trying to time the market.