‘October: this is one of the peculiarly dangerous months
to speculate in stocks….. the others are July, January,
September, April, November, May, March, June, December, August
and February’ This is a quote from Mark Twain. The point
is clear; there is no good time to speculate in stocks. Why?
Because short term movements are highly unpredictable. Many
people do indeed consider September and October to be months
to avoid in the stock markets since major crashes have often
occurred during these months. October has been a black month
for Bali for different reasons. But the past is not a certain
guide to the future. In the past month several clients requested
a reduction in their stock market holdings and others said
they would prefer to hold off until October was behind us.
There is still time for them to be proved right but at the
time of writing those who were not invested in stock market
funds have missed the opportunity to benefit from record highs.
History has shown that it is far more risky to be out of the
markets than in them over a period of time.
Timing could work – if only…
Anyone clever enough, or more correctly, lucky enough to time
the bottoms and the tops of markets would become very rich
in just a few years. In practice, it is virtually impossible.
Let’s say for example, a share or fund rises by 50%
in six months. Do you hold or sell? The fact is, if you sell
you have indeed taken a handsome profit. But if the share
or fund then rises another 50% or more you have missed out
on further gains! Selling at the 50% would actually be a wise
move but my experience has been that investors would prefer
to hold in the hope of making even more gains. They then focus
on securities that have shown losses and suggest selling those
and moving the proceeds into the investment that has made
a lot of money. Problem is, fortunes can be quickly reversed
so that this year’s winners become next year’s
losers and vice versa. Constantly chasing yesterday’s
winners can lead to the rapid depletion of one’s wealth!
Attempting timing is still better than following the herd
Perhaps the worst enemy of investing is human nature itself.
I do not recall the precise figures but I remember seeing
a statistic to the effect that when the world’s largest
mutual fund enjoyed strong growth to the tune of around 80%
over a five year period in the 90’s the majority of
its investors still lost money! This is because the majority
were not in the fund at the outset but tended to invest each
time the fund was riding high, egged on by publicity and ‘peer
pressure’. Who wants to be the odd one out at a dinner
party when others are proclaiming how much they have made
in a particular asset, be it a fund, property, gold or whatever?
The temptation is strong to go out and buy the same asset
just to ‘get into the club’. Invariably it is
too late; the big money has been made. This is when the slow
and cautious investors get tempted into the market, only to
get their fingers burnt. I have met many people who are against
stock markets because they were drawn in by the hype of the
late 90’s, particularly in technology stocks, only to
lose heavily over the next three years. Yet stock markets
have generally outperformed other assets over the long term.
What about property?
Much the same applies. Property markets can collapse just
like stock markets and many people are tempted in when prices
are high (and interest rates often low, which is a contributing
factor) only to be left high and dry with a property worth
less than the outstanding mortgage. No-one is in a buying
mood when prices are falling. Yet this should be the time
when people should be buying. But the psychology – and
interest rates – can be off-putting. The problem is,
even for those who try to time the market, they can get it
very wrong. Three years ago people were predicting a possible
crash in the property markets in the US, UK and Australia.
Cautious investors held back, waiting for the crash but it
never came. Instead they watched prices surge even higher.
Even though there has been a levelling off of late there has
been no crash so those who held back three years ago are still
going to pay a much higher price today.
So should we or should we not be timing the markets?
If you are still with me you must be wondering whether I am
for or against market timing. On the one hand I am saying
bad timing can be disastrous and on the other that timing
the market correctly is virtually impossible. This is where
I would suggest we adopt both a strategic and tactical approach.
A strategic approach is what is needed for the bulk of one’s
assets. No matter what the state of the markets you should
not be tempted to throw the bulk of your cash at an asset
that looks particularly attractive at the time, whether the
price is a bargain or it appears to be a star that will continually
rise. If you have cash to invest in a financial asset, the
bulk should go into a professionally balanced portfolio consisting
of a wide range of assets, not just stocks. Ignore the state
of the markets. This is for the long term. A boom or bust
in any of the asset classes will have little impact in the
long term. There is no problem however in attempting some
market timing for up to say 20% of your investment. The same
principle applies to property. Your primary residence is a
strategic investment. If you do not own a home then you should
buy one if you can afford it irrespective of the state of
the market. You can only make a loss if you sell at the wrong
time. Investment property is another matter. Here you can
indeed try to time the market as long as you accept you are
now moving into the tactical area which could mean big gains
or losses.
So there you have it. There is some scope for timing, but
for basic financial planning it is of limited importance.
More important is to have a proper basic strategy in place
and to avoid the danger of putting too much into any single
asset.
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions related to personal finance you may
contact him at 021 520 8099 or
colin.bloodworth@financial-partners.biz
