Behavioural finance

Waiting for a tipping point

12 June 2023

By Alexander Joshi, London UK, Head of Behavioural Finance

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

  • So far this year, investors have been on something of a bumpy ride – with bank runs to contend with, aggressive rate hikes and economies skirting recession – and there’s no telling what’s in store for the rest of 2023
  • But, waiting for a tipping point to occur, that makes the decision of whether to invest or not crystal clear, can be costly  
  • Our research shows that even someone who invested in the S&P 500 at the worst possible time in each of the last 13 years would now be 63% better off than having sat on the side-lines 
  • Nevertheless, staying invested in extremely volatile markets requires nerve – especially with doomsayers predict another rerun of the global financial crisis, requires nerve. But it remains a prerequisite of successful long-term investing, targeting preserving or growing funds to meet your end goals

It has been a tough year for investors, in-part given the economic after-effects of Russia’s invasion in Ukraine and the tail-end of the COVID-19 pandemic. 

As geopolitical risk, not least Sino-American relations, stalk financial markets, the combination of stubborn inflation, future interest hikes and recession risks, potentially add to further uncertainty and strain in the second half of the year. While it might be time to buckle up, it’s imperative that investors don’t allow themselves to feel overly anxious. 

Waiting for the mist to clear

As investors try to judge the path for interest rates, inflation and economic growth, they, along with central bankers, are paying attention to each and every data release for hints of what it might mean for policy and financial markets.  

Some investors may be holding out for a brighter investing environment, indicated by signs of rate cuts or more vigorous growth in advanced economies, before investing. However, as we’ve seen in the last year, just as one cloud disappears, another one can take its place. 

In other words, as investors weigh up all the information, some may be waiting for a tipping point to emerge before seeing an environment more conducive to investment returns.  

Is there a perfect time to invest?

But, is there a perfect time to invest? Of course, but only in hindsight. For example, after COVID-19 struck in early 2020, equity markets sold-off and bottomed on 23 March that year. They then quickly recovered.  

Trying to time the market and invest when valuations are close to their bottom is extremely difficult and can induce investors to take biased decisions that hurt long-term returns (see Being comfortable with the uncomfortable).  

Understanding market expectations 

When thinking about market timing, it's important to understand how market expectations are formed. Markets are forward-looking and future events are priced in, which gives investors implied probabilities. For example, OIS forwards currently imply the first 25-basis point rate cut by the US Federal Reserve will be in December 2023.

Because of the forward-looking nature of markets, in many cases the events that investors are waiting for, before taking action, have already been priced in. Therefore, the realisation of the event may cause a security’s value to change by much less than an investor expects. Indeed, it is surprises that may have a larger impact on the market; for example, a data point which is worse than expected. 

Waiting for an event to happen might mean acting too late, and inaction might be counterproductive. This is because while investors are waiting for something to happen, inflation eats into your capital. In such circumstances, even investing in the market at what seems to be the wrong time, can trump doing nothing (see chart). 

Even bad timing trumps delaying investing over the long term 

The wealth of five investors in the S&P 500, following different investment strategies, since 2010 shows that poor timing (or investing at each year’s market high) would be worth 63% more than having left the funds in cash

The wealth of five investors in the S&P 500, following different investment strategies since 2010.

Sources: Bloomberg, Barclays Private Bank, May 2023

Note: Perfect timing – Investing in the market every year at the lowest closing point; Invest immediately – Investing in the market on the first day of trading; Dollar-cost average – Investing in 12, monthly, equal instalments; Bad timing – investing at the market’s peak for the year; Stay in cash – Treasury bills were used as a proxy for investing in cash.

Hold your nerve

Many investors might feel that this year has gone well, simply because advanced economies have avoided a recession, contrary to some economist predictions six months ago. While that may be so, growth has been sluggish. With inflation heading lower at last, albeit more slowly than expected, and central banks turning the interest rate screws tighter, the rest of the year could be stormy (see Global economy: the good, the bad and the ugly). 

That being said, the outlook need not be entirely gloomy. The end of the hiking cycle could be in sight. 

In fixed income, calling the peak in policy rates may be fruitless, and history suggests that investing in investment grade corporate bonds should produce a positive return, from an absolute and relative perspective. 

In equities, while the near-term outlook appears challenging, long-term prospects remain encouraging, and a more defensive, but balanced, positioning makes sense. That there is no exuberance and investors’ sentiment is at best neutral, if not outright cautious, could, counterintuitively, also be seen as supportive.

Also, in the face of bank runs in March, persistent rate rises and fears that the US may breach its debt ceiling, equity markets have been surprisingly resilient. The S&P had roared ahead by 9.5% in 2023, by the end of May.

Sunnier long-term prospects

While the short-term outlook may be challenging, longer term the outlook is better. Focusing on equities, cyclically adjusted price-to-earnings ratios imply an 8% return over the next ten years (5% if dividends are excluded from performance). By contrast, US 10-year Treasury bonds currently yield 3.7% over the same period (see Brace for near-term squalls, position for the long term).

So, while it might be worth reducing portfolio risk, by perhaps hedging portfolios against market falls, in the short term, the importance for long-term investors of remaining invested is clear from the point of view of preserving and growing wealth (see The importance of an optimistic outlook). 

Think about today

When mulling over whether to invest or not, or whether it is better to do so in bond or equity markets, a sensible approach would be to take a step back and think about one’s individual long-term goals, as well as the investment decisions that would likely maximise the chances of reaching them. When investing, people should view the market and their decisions through the lens of their own circumstances.

If the primary aim is to protect and grow wealth for the long term, remember that humanity’s ability to innovate lies behind most long-term success stories. And through wars, famines or pandemics, business innovation has invariably persisted.

Worrying about trying to find the perfect moment to act is often a fruitless task. Holding fire and waiting for the perfect moment to strike can introduce complexity and risk into the decision-making process. In doing so, getting hung up on timing the market correctly might ultimately leave you poorer.  


Mid-Year Outlook 2023

Explore our “Mid-Year Outlook”, the investment strategy update from Barclays Private Bank.