It is all in the timing
Published in Money Management January 2009
I read with interest the article written by Michael Dale of Fiducian Financial Services (Money Management 4 December 2008) titled ‘It’s not a matter of timing’. What always strikes me as interesting is that many in the Financial Planning industry believe ‘timing the market’ is about picking exact tops and bottoms in the market, but this is probably the most perpetuated myth in the financial planning and managed fund industry.
The reason why most of us hear the words ‘buy and hold’ or ‘it is time’ in the market that yields returns is because the industry cannot or does not want to time the market. Firstly because the funds are simply too large to manoeuvre with any speed, and secondly because most do not want to put in the effort required. Consequently investors are cautioned about the perils of market timing and have to be content with ‘average’ returns at best. It’s no wonder individuals are embracing direct investment, which is evidenced by the significant growth of SMSF in recent years and the high percentage of Australians who hold shares directly.
The common misconception presented by some in the industry to get investors to believe that time in the market is more important than timing the market is their claim that ‘market timers’ sell when a market is low and are out of the market when the inevitable rally occurs. They assert that ‘market timers’ run the risk of being out of the market at the trough of a decline when sentiment is at its most negative and potential returns are at their greatest.
However, the reality is that market timers exit near market peaks using stop losses to protect capital as part of sound risk management, and enter near market troughs to capitalise on the inevitable rally that occurs. This strategy not only reduces portfolio risk, it increases returns both of which benefit the investor. There is nothing magical about it.
To substantiate the argument that ‘It’s not a matter of timing’ the industry suggest that if you are out of the market on the 20 biggest days that the market is rising over a 10-year period, your return will fall substantially. However, the inverse of this argument is that if you are out of the market on the 20 biggest days that the market is falling, it stands to reason that your returns would surpass the market average over any 10-year period. After all, markets don’t crash up, they crash down.
Even Warren Buffett times the market! At the bottom of the bear market in October 1974 Forbes magazine interviewed Buffett and when asked "How do you feel? Buffett responded by saying ‘Like an oversexed guy in a whorehouse. Now is the time to invest and get rich.’ As Buffett so aptly states ‘most people get interested in stocks when everyone else is but the time to get interested is when no one else is.
In the current climate we have experienced the biggest one day falls in history, with the fall over the past three months accounting for 49% of the total fall on our market since November 2007. No doubt clients of so called ‘market timers’ who moved assets into cash are certainly very grateful right now, as their portfolios were not exposed to the huge declines experienced in recent times nor are they suffering the 30 to 50 per cent losses being reported by many fund managers.
The bottom line is that ‘timing the market’ is about preservation of capital. It is about selling out of assets that are falling in value so as to protect capital. If an asset falls in value by 30 per cent, it has to rise by 43 per cent just to break even and if it falls by 50 per cent, it has to rise 100 per cent to break even. If historical returns are any guide, it will take 3 to 5 years for an investor’s portfolio to recover to the value it was just 13 months ago. This is because it is highly unlikely that the market will recover to the highs we experienced in November 2007 for quite some time.
As we know, markets do not fall forever and when the dust settles, and the market does rise, history shows that the average rise up out of a bear market in the first 12 months is around 30 per cent. Therefore those who have timed the market and had their clients in cash during the past year will quite feasibly see their client’s portfolio rise back to previous levels or higher during the next year as they are able to reinvest from a higher cash base. Now that has to be smarter investing.
