People often ask us: should I invest now? Or should I delay selling or buying? In essence, these questions are about market timing – that is, the strategy of making buy or sell decisions of financial assets by attempting to pick future market price movements.
But trying to correctly time your entry point to the market is never easy. Just ask the experts.
In February this year, strategists at a global investment bank were becoming alarmed at political events in Europe, the sequestration “crisis” in the US Congress and what they saw as an unseemly rush into equities.
They advised their clients to put a tactical alert on stock investing over the next one to six months. A month later, however, the bank strategists decided to reverse course (‘Credit Suisse Reverses Cautious Stand on Equities’, Reuters, Mar 12, 2013). The problems in Europe, they now discerned, were not systemic, and the likelihood was that continuing easy monetary policy would support investor sentiment globally. As a result, the experts told clients to cautiously re-enter the market over a number of months.
That’s a shame for the clients, because at time of writing, the Global MSCI was up by 8.6% in US dollar terms this calendar year. The US S&P 500 was up 10.7%, the FTSE-100 9.9% and Australia’s S&P/ASX 300 10.7% in local currency terms.
This sort of commentary isn’t just happening in the US. In Australia, one of the most highly recognised market commentators, writer Alan Kohler, issued an ominous warning to his subscribers in December 2011:
“The conditions are in place for a panic sell-off,” Kohler said. It is not certain that it will happen…but the risk is now such that you must take action. I will be significantly reducing my already reduced exposure to equities possibly to zero” (‘The Eureka Report’, Dec 19, 2011). Explaining his mistake later, Kohler said he had not foreseen the extent to which central banks would continue to pump cheap money into the financial system.
That’s all very well. But the fact is anyone who followed his advice and went to term deposits has missed a rally in the Australian share market of more than 20%.
Providing reliable investment advice based on macro-economic, technical and political news is a tough gig.
For the investor, the lesson is that the closer you are to market noise, the harder it is for you to pay attention to the bigger picture.
Markets are moving constantly as news and information is built into prices. Sentiment is buffeted one way, then the other. Millions of participants make buy and sell decisions based on news or their own individual requirements.
The job of media and market analysts frequently boils down to creating plausible narratives around often disconnected events so that it all appears seamless. If you’re a broker or a journalist, your time horizons are in minutes, in which case, this approach to markets makes sense.
But for investors with long-term horizons, second and third guessing money decisions based on the news of the day is unlikely to deliver sound results.
A better approach
A better approach is to work with a trusted advisor in developing a sound financial strategy, and building a diversified portfolio of assets tailored for your needs and risk appetite. Your adviser can rebalance your investment portfolio regularly to match your requirements, not in response to what is happening in the markets. Otherwise, there is always a risk that the news overtakes you. As a wise man once said, running inside a moving bus won’t get you to your destination any quicker.
If you’d like to find out more about a better approach to managing your investments for enhanced risk-return outcomes, simply contact us. We’d be delighted to help.
Thanks to Dimensional Fund Advisors (March 2013) for source material for this article.