Timing the market, not time in the market
Published in the Geelong Advertiser September 2008
THERE is an age old industry adage that implies the simplest way for mum and dad investors to build wealth when trading the share market is to dollar cost average.
The methodology requires you to make regular investments regardless of the direction of the market or the stocks you are trading.
However, in my opinion, this strategy is fundamentally flawed as it ignores one of the most important principles of investing, which is to manage risk.
For example, had you invested $5000 in shares every quarter from the beginning of the bull run in March 2003 to the present day, without consideration for the direction of the market, your investment would have generated an annualised return of around 6.6 per cent p.a.
On the other hand, had you decided to exit the market at the end of January this year, in order to manage risk, you would have annualised a return of around 16 per cent p.a.
This is why I advocate the importance of timing the market as opposed to time in the market.
So, what can we expect in the market?
The All Ordinaries has been extremely volatile over the last couple of months given that one week it appears as though the market will break above resistance at around 5200, while the next it looks like it will break through support at 4880.
Last week, I believed the sideways consolidation would hold to create base support for the next move up.
However, with the collapse of Lehman Brothers and the $85 billion capital injection by the US Government to keep AIG afloat, my opinion has changed in the short term.
As a result of the US crisis, the Australian market has experienced a sharp decline, which has broken the 4880 support level.
As you will remember from previous reports, the next level of support is around 4300 points, which is very strong and I am confident that the market will find support between its current level and this next strong support level.
With the US presidential election only weeks away, we can reasonably expect the US market to move into a holding pattern until there is certainty about who will control the country, which is likely to settle our market as well.
As always, it pays to be patient and to only enter the market when it indicates that it is safe to do so; until then I urge all investors to sit tight.
