Expert Bust #13 - Time in the market

Sooner or later, with the internet of things, we're gonna have to let go of the old adage about "time in the market". Timing the market will eventually rule.

About half the time spent owning an investment property is unprofitable. Here's a typical example of 30 years of the Sydney median...



And while Sydney was flat, other cities were booming, like Brisbane...



And Perth...



The question is whether the capital growth difference (opportunity cost) is more than the cost to sell and buy again elsewhere (recycling costs).

I created a program to answer that question, to compare holding long-term vs. buying and selling (trading). Then I trialed it with a simple trading algorithm.

I couldn't use supply and demand metrics like auction clearance rates or selling times since this data wasn't available 30 years ago. All I used was Long Term Growth (LTG) over the last 10 years.

Buying rules:
1) LTG (10 years) must be between 0% pa and 6% pa preferably 3%.
2) Growth last 9 months of more than 4%

Selling Rules:
1) Growth last 12 months less than 6% pa
2) Can’t sell within 3 years
3) Must sell after 5 years

I started at year January 2000 and picked the best market according to the buying rules. Then each month I applied the selling rules to see if a sell was triggered.

Once a sell was triggered, I calculated all the selling costs like agent's commission, CGT, etc. I also considered all the buying costs such as stamp duty, legal fees, etc.

The next month I applied the buying rules again with the sale proceeds to buy in the next market. I repeated this until I came to the most recent month.

Then I compared the performance of trading with that of holding the 1st property for the long-term. I also compared the trading performance against the national growth rate and the performance of the best city for that total period of time.

I repeated the whole process again, but picking the 2nd best suburb according to the buying rules. And then the 3rd best and so on until I had trialed the algorithm 20 times over 20 years.

The results:

• Trading average 496%
• Trading outperformed:
  • Holding long-term 310%
  • National average 279%
  • Sydney, Melbourne & Brisbane average 298%
  • Syd, Mel & Bris within 10km of CBD average 331%
  • Best significant urban area (Hobart) 402%
  • Top SA4 (Mornington Peninsula) 450%

This trivial algorithm outperformed pretty much every benchmark.

I repeated this whole process again starting from June 2000 instead of January 2000. The results were even better. I repeated the 20 tests again but this time starting from January 2001 and again from June 2001. The results were all fairly similar.

I tried other algorithms using different metrics than LTG. They showed promise, but not as much as the LTG. Combining them would have been best.

And that's the thing: we have access to many more metrics now days compared to 30 years ago. And it will only get better in coming years.

 

shhh the experts may hear you

 

100 % agree with you . Timing is the most important aspect .

Cliff

 

I second that. I started my IP journey at the wrong time of that market. Costly mistake, especially for starters

 

This is a great analysis and actually it goes to the heart of one of the biggest belief we investors (or a large majority of us) hold dearly - Long term remaining invested will always work out much better than chopping & changing.

My core belief over 2 decades of prop investing has been that it is next to impossible to predict with a significant probability, if it's worth the time & cost to liquidate in one market and accumulate in the other. I think part of this has been the 'regret' factor. We always look back at those that we sold and ruminate over 'how much more' that prop is now worth.

My belief on trying to time the market was largely shattered with my own Residex experience so I have always since stayed put however if you have managed to put this together and if it works on any timeframe since 2000, then that sounds like a very convincing argument for the wider PI community to ponder at.

 

Awesome

Is it the right tome to invest now ?

Hindsight is great sand all.

 

I’m not surprised it out performs. It’s still a mugs game for the average investor. I think the key is diversification across markets to catch growth through the cycles.

 

Wow.....so you look at what you could have done, now that you own the answers.

Can your next myth be, you don’t need to lose when you gamble? You can tell me the numbers that I could have picked and how one line would turn $5 into $5mil

Got any crystal balls for sale?

 

Property is about finance once you have the finance whatever the market does doesnt matter and doesnt affect profitability. Just look at the last 2 years you are suggesting a 7% p/a is unprofitable even though massive capital gains have been made for 94% of the time. In those 2 years profits could have increased 200% with a 70% drop in interest rates, a loss making property may even be in profit with maybe $40k less in interest payments. If the equity was used to buy shares a year ago 70% returns were easily achievable. Does the chart include properties that werent bought for making profit from ? Looking at a broad market and drawing conclusion about an individual investment is silly. Like saying buying DDR is unprofitable because the ASX flatlined. If you want to buy the market you have get shares in an REIT. You time maybe better spent looking at and trying to understand confirmation bias. A chart can show anything you want to see.

 

The algo was not fitted to work with the "answers", i.e. the past data. No specific hindsight was used.

 

I must not understand what you mean by what the market "does".

I get your point about the interest rate. The entire market w/o exception could be flat, but if interest rates drop dramatically, then a property could become profitable despite no growth. Fair point.

BTW, the performance of the algo was compared with the "broader" market as a benchmark to see if it outperformed. This is common practise and is referred to as the "alpha" in the share market.

You also said, "A chart can show anything you want to see". I would counter that with: "Charts are some form of evidence - better than guessing and pure opinion". It's when charts don't show you what you wanted to see that you learn the most from them.

 

This is a great post and analysis, thanks @datageek ! Once more data is readily available we will see a new generation of data driver property investing analysis that is in line with shares. Can definitely see a future of property investing that is more reliant on predictive modelling and other metrics (DSR etc) and those who can interpret the data might be able to capture alpha by trading properties.

 

Predictive modeling??

haha.

please tell me when the next pandemic of global financial crisis is going to be?

surely the biggest disrupters to any statistical solution.

I would even settle for you telling me when apra might intervene or not