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Can you beat the market?

We hope you enjoy this article from our archives. As investment, pension and tax rules change a lot over time, the information in this post may not be current, but we hope you still find it interesting.

Yang Yang

5 May 2020|3 min

Investors often wonder if they can “time the market” by selling their investments when markets drop and buying them back when markets rally. Now is your chance to develop your own trading strategy by picking buy and sell options for a historical period. Can you beat the market? You might find it‘s harder than you think.

This game is designed to work on a desktop computer and will not appear on your mobile device.

How it works

  • The orange line is the “buy and hold” strategy. Its performance matches the FTSE 100 Total Return index, a measure of the UK stock market, with no attempt to time the market.
  • The blue line is the player’s strategy, which follows a rule throughout the period to try to outperform the market by selling investments when the market drops and buying them back when the market rallies.
  • The rule sets out percentage thresholds to trade based on market close prices, i.e. ignoring the intraday price movement.
  • At the start, the player is 100% invested in the market. Being in the market means you are 100% invested in the FTSE 100 Total Return index. Being out of the market means your holdings are 100% in cash, which is assumed to earn an interest rate equivalent to the LIBOR 1-month GBP rate. Interest is accrued daily and counted as part of the daily return.
  • The thresholds are compared to the market index referenced to its watermark. The game will sell the investments if the value is down by X% and buy investments if the value is up by Y%. Calculations are based on the bought price or the highest index level in the recent holding period, whichever is higher, and on the sold price or the lowest index level in the recent period that is not holding, whichever is lower.
  • In this game, the X% and Y% trading triggers must be positive numbers as this is not a contrarian trading tool, but works as a momentum/loss stopping strategy.
  • Trading is done T+1. This means that when a threshold is triggered, the trade is implemented at the close of the following day.
  • Both buy and sell trades are penalised with a 0.05% trading cost each time. This is a typical spread when trading large-cap equity ETFs based on indices such as the FTSE 100.
  • A total return index for the FTSE 100 is used so that any dividends are assumed to be reinvested, ignoring the trading cost.

Note on indices

In reality, retail investors are not able to invest directly in indices such as the FTSE 100 Total Return index, or directly in interest rates. Index returns can be closely matched by investing in tracker funds or exchange-traded funds (ETFs) with varied levels of holding cost (this includes fund cost, tracking difference and other expenses).

Acknowledgements

This game was co-created with Qing Ou, principal data engineer at Nutmeg.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Simulated past performance is not a reliable indicator of future performance.