05 Mar Is this a good time to invest?Read Time: 4 minutes
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Now that the UK is definitely going to leave the European Union, one of the uncertainties which has filled the news for over three years is at least resolved, although the details of how that will happen and what the consequences will be remain pretty opaque.
The removal of one such uncertainty has now been replaced by another, namely the likely impact on the global economy and markets of the Covid-19 coronavirus. Such uncertainty was reflected last week in investors selling off equities and as we live in a global economy, even countries with so far few identified cases were affected, including the UK.
While the resolution of one question over the EU may have caused some investors to decide that they should no longer hold off from committing long term capital to equity investments, the coronavirus situation reminds us that there is always some uncertainty around. On the other hand, some cite the continuing lack of clarity over what (if any) trade deals will be done with the EU and USA as reason enough to defer action. Perhaps they should wait until the nature of the deals is known? Or until the next meeting of the Monetary Policy Committee? Or the US presidential election? Or until the coronavirus spread has been stopped?
Such decisions are normally driven principally by emotion and whatever assumptions the individual chooses to use to support them. Underlying them is the fear of making a bad decision by investing at the wrong time and then regretting the outcome.
Clearly, the best investment approach is to invest at the bottom and sell at the top – the classic ‘buy low, sell high’. The difficulty is that just about nobody manages to get either of these decisions right on a consistent basis. Arguably the best way to make money out of market timing is to write a book about it and persuade people that if they buy it, they will learn the secret and get rich too. If any of those authors actually knew how to do it, why would they give away (and even selling a book at $20 a copy is giving it away if it really contains such a valuable insight) the information to people they don’t even know?
Stories about market timing are always popular among financial journalists. For a start, a lot of their consumers believe in it, so there is an open door at which they can be pushing. Second, there is always a commentator who is willing to take the minor risk of losing credibility from a duff forecast (with so much news around, nobody can remember what one individual said last month anyway) in exchange for some free publicity for themselves or their employer.
Some offer approaches which might have worked historically but which rely on one or more strategies which are complex and difficult for the ordinary investor to implement. For example, an academic study1 in 2015 suggested that the US market returns were predictable based on the timing of the meetings of the Federal Reserve’s interest rate policy committee. Even if this correlation were valid, once the paper was published (and publicised), it is not unreasonable to expect that some market participants would rapidly implement strategies to exploit such an inefficiency and thus it would soon disappear. The rest of us mere mortals who lack the time or inclination to try can at least take comfort in the fact that markets tend to be a lead indicator of the Fed’s announcements, so by the time they are made, prices already reflect those expectations.
It is natural to want not to lose money but that doesn’t mean that we need to expend energy worrying about short term movements as long as we are invested in a way that is consistent with our long term goals. A good starting point is to remember that we do not need to choose just between being 100% in the market and 100% outside it. Ideally, Once we have determined that our strategic asset allocation should be 20%, 50% or whatever in the market, we should stick with that unless either our goals change or our willingness or ability to take the associated level of risk does.
We can also take steps periodically, when market price movements have moved our portfolio away from this, rebalance it back to the target composition. This enforces the discipline of selling relatively high and buying relatively low, which is logical but not always easy when emotions are involved.
Then again, some of our clients employ a technique called pound cost averaging, to drip new money into their portfolio on a monthly basis over a period of up to a year. While the academic evidence suggests that the optimal approach in terms of outcome is actually to invest it all at once, this might not be the best route in terms of the experience that you have. Behavioural finance researchers have discovered that we feel regret more strongly over a decision that we made to do something than we do over a decision not to act. In other words, we feel more pain if we invest and the market goes down than if we did not and it goes up. Having a good experience is important because if you don’t, it can put you off the whole idea and cause you to miss out on the returns that might enable you to achieve your future goals.
It turns out anyway that even though dripping money in over a few months might not be the best option, it actually has very little negative impact for a long term investor even if the market goes up over that period.
Identifying the best times to get in and out of the market is really difficult although I did recently meet someone who managed it while working as an investment manager in 1987, selling in the summer shortly before the October correction that year. However, even he admitted that the reasons for the decision were nothing to do with expecting a crash and he was just lucky, although he did look like a genius compared to his contemporaries.
The good news is that we don’t need to rely on genius or even luck; just a few simple rules and keeping to the strategy that you originally set when determining how to achieve what you want in life.
- ‘Want to play the market? Count the Fed leak weeks: Study’, Reuters, 21st November 2015