While unit trusts are the most prevalent and popular form of investing they have their drawbacks. Unlike exchange traded funds they are only priced and traded once a day. That means all trades or fund switches placed by UK investors are collated and transacted at the same time by fund platforms and fund houses.
In addition, because they are forward priced you don’t actually know the price you are buy/selling/switching at when you place the trade. Furthermore because a fund switch does in fact involve a sell instruction and then a buy instruction it can cause a delay leaving you out of the market for a short period of time. This is something that I covered in detail when answering an 80-20 Investor question in Chatterbox. For ease I replicate my response here:
“When switching unit trust funds there can be a time lag between the point at which you sell one fund and the time at which you invest in the new one. This may be as short as a day but can be longer. Obviously any time you are out of the market it could move against you.
So for example if the market crashed on Monday and you sold out at close of play that day (you’d sell at a low) but then the market rallied on Tuesday while you were out of the market (so you bought back in at a high) you would essentially have crystallised a loss for the last 24 hours. Now I’ve deliberately given an extreme example just to illustrate the point.
However when markets are very volatile the chances of the market moving against you as described are much higher. So that’s why I tend to avoid trading during periods which are likely to be more volatile. Of course the market could move in your favour (you sell high and buy low). In the long run these things even themselves out but it’s just sensible to avoid periods where increased volatility is expected. You can’t market time and it’s just one of the occupational hazards of using unit trusts because you don’t know the price you sell/buy at when you make a switch."
However, this got me thinking does it really even itself out as it should (i.e. markets move for and against you over time)? I was also recently asked about the best time to place a fund switch. Because most platforms and fund houses have either an 11am or 12pm cut off for accepting instructions it means that any trades placed before those times are actioned at the next pricing point.
So if you place a trade on a Monday at 9am then you will sell out by close of play Monday (at a price you don’t know in advance) and be out of the market all day Tuesday and back in at close of play Tuesday. That means you are back in the market by Wednesday.
If however, you place a trade at 12.01pm then you would in effect remain in the market all day Monday and Tuesday and be out of the market on Wednesday and back in by Thursday. That’s because the next cut off point for accepting new instructions is 11am Tuesday. Of course this is all assuming you are out of the market for only 1 day. Sometimes it is longer, particularly if a fund invests in overseas assets.
That means that if you intend to place a trade on Friday afternoon you may as well wait until Monday morning to place it, just in case the world ends over the weekend. But this got me thinking, is there an optimum weekday to make fund switches, so that you are less likely to be impacted negatively by being out of the market, or does it make no difference at all? Equally is there a day to avoid making fund switches? No one has ever attempted to answer that question until now.
To answer that question I decided to just focus on one market and one asset type, namely UK equities represented by the FTSE 100. In order to test objectively whether there is any discernible trend I analysed the performance of the FTSE 100 on every trading since it launched on 3rd January 1984. That is 8,766 trading days.
I then replicated a fund switch being placed on every day (including the subsequent day out of the market) and compared it to what would have happened if you’d remained invested. So in essence I replicated over 8760 fund switches and worked out how much markets would have moved for or against you. I then grouped the results by the day of the week that the switch was instigated. I assumed all the trades were placed before 11am and that I was only out of the market for 1 trading day.
Interestingly the average gain/loss was -0.03%. Now if things truly evened themselves out then we’d expect a figure of 0% so this is close enough. However there is a slight skew to the downside. But why the slight negative result? The answer probably lies in the underlying trend for equity markets to move higher over time despite their peaks and troughs. This underlying trend means that any time out of the market will on average mean you miss out on part of this underlying uptrend, which is driven by inflation as much as anything else.
Of course this -0.03% average masks some pretty big extremes. Some of the biggest gains and losses occurred during seismic market events. For example if you’d made a fund switch on 21st November 2008 you would have lost 9.88% by missing out on an extraordinary post-Lehman rally. Meanwhile making a fund switch on 19th October 1987 would have seen you 13.18% better off as your day out of the market would have coincided with the worst of the Black Monday crash.
The best day of the week to make a fund switch
The table below is based on over 33 years of data and summarises the chances of the market moving against you if you placed a fund switch before 11am on each day of the week.
| Weekday | Chance that the market moved against you |
| MONDAY | 52.41% |
| TUESDAY | 51.54% |
| WEDNESDAY | 51.73% |
| THURSDAY | 53.78% |
| FRIDAY | 45.43% |
This is a fascinating result. If it was completely random then the chance should be 50% for each day of the week. The fact it is not is again probably indicative that markets generally move upwards over time and I am averaging over 8,000 trading days. However, what is significant is that switching funds on a Friday is clearly the best day to do so. In fact the difference is statistically significantly. But why is this?
Logically you might think that making a switch on a Friday morning could be a risky move. After all there are almost 3 days where you are in limbo in which anything can happen to move markets. Often central banks and governments deliberately leave market moving interventions or announcements until markets close on Friday to minimise the impact on markets. Yet upon reflection Friday is probably the best day to trade because it means that you are out of the market on Monday. With investment markets closed over the weekend any pent up angst is unleashed on Monday morning and is likely to produce a spike in volatility. In contrast, come Tuesday when you re-enter the market after making your switch, clearer heads more than likely lead to some form of rebound from Monday's jitters. You then capture this upside without Monday's downside.
So what about the average market move on each day? The table below suggests making a unit trust fund switch on a Friday is likely to yield a tiny performance boost to your portfolio. Admittedly we are dealing with small numbers here but the trend is interesting.
| Weekday | How much are you better or worse after making a switch |
| Monday | -0.06% |
| Tuesday | -0.02% |
| Wednesday | -0.02% |
| Thursday | -0.07% |
| Friday | 0.03% |
On the flip side, it would appear that Thursday is the worst day of the week to make a fund switch.
Are there any other indicators of when's best to make a trade?
I decided to try and take this further. Were there signs of any red flags of when to not make a fund switch?. Or any positive markers as to when to make a switch? Theoretically you want the market to be falling when you are making a fund switch and are out of the market, but you can't predict the future. So I crunched the numbers to see what would happen if you only made a fund switch when markets had fallen the day before. The results are below:
| Market moved up or down day before switch | Chance that the market moves against you |
| Down | 52.60% |
| Up | 49.60% |
The table really shows that trying to market time based on what happened the day before, which most people do (i.e aim for a downtrend), won't help you. In fact it will more likely hinder you. Markets clearly tend to swing up and down.
I then looked at what would happen if on the previous day the market had moved up or down by more than 1%. The results are below:
| Market moved up or down by more than 1% on day before switch | Chance that the market moves against you |
| Yes | 50.48% |
| No | 52.42% |
I then extended this to what would happen if the market moved up or down by more than 1% two days in a row. Interestingly the result (although not statistically significant) suggests that markets may be more likely to move against you the longer market volatility exists.
| Market moved up or down by more than 1% for 2 days before switch | Chance that the market moves against you |
| Yes | 52.99% |
| No | 50.17% |
To sum up
The big takeaways from this analysis are that:
- Friday (before 11am) is statistically the best weekday to make a fund switch.
- Trying to market time by just looking at whether markets move up or down the day before won't help you
- In fact a swing down or up is just as likely to be followed by one in the opposite direction which can catch you out
- If markets are continually volatile (with market moves of more than 1% each day) for at least two days then by avoiding making a switch you may lessen the chances of markets moving against you.
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