When is the Right Time to Invest?

Given the volatility in the Australian stock market right now, you may be questioning is now the right time to be investing in the stock market. Given this, in this week’s report Dale looks at the concept of market timing and how this can support you to manage you risk.

Market timing

Investors are continually told to leave their money with professionals and to accept swings in the market over the long term, as many believe you cannot time the market. Those who advocate 'time in the market' attempt to discredit supporters of 'timing the market' by pointing to the small number of times the forecaster was inaccurate in order to prove their point.

With the fall into the March low and subsequent rise up, many investors attempted to time their exit and entry into the market and, so far, many have been rewarded for their decision, but there are plenty that got it wrong. That said, in ASICs recent report on investors trading during COVID-19, they indicated that retail investors get it wrong most of the time, which I tend to agree with.

So what is market timing? Put simply, it is about managing risk, no more, no less. If the risk of holding an asset becomes too high it should be sold. Just as importantly, if the risk of holding an asset decreases, it should be held, provided it supports the investor’s objectives.

Every week I predict what I believe the Australian market will do in the short, medium and sometimes long term, and while I get it right the majority of times, sometimes I don’t. However, just because a prediction does not unfold does not mean that ‘market timing’ is not an effective strategy. While I am able to forecast moves in the market with an incredibly high degree of accuracy, market timing does not work 100 per cent of the time, therefore, you need to be prepared that some predictions will not be correct.

Remember, market timing it is about the risk of holding an asset first and foremost, and not about attempting to grab some quick profits, as retail investors are trying to do right now. While some will get it right some of the time, most will get it wrong. Consequently, those who were lucky in getting it right in recent times may be in for a big shock, as there is a high probability they will lose the gains they have made over the past few months.

What were the best and worst performing sectors last week?

Materials ended last week as the best performer up over 2 per cent followed by Healthcare up 1.43 per cent while Financials were just in red. The worst performing sectors included Industrials and Energy, which were both down 4.28 per cent followed by Information Technology which was down 2.70 per cent.

Looking at the ASX top 100 stocks, the best performers included ResMed up over 7 per cent, AMP up almost 6 percent with JB Hi-Fi not far behind up 5.65 per cent. The worst performers included Flight Centre down over 16 per cent, Challenger down over 13 per cent and Qantas, after announcing it was shedding jobs, closed down 12.81 per cent

What's next for the Australian share market?

While many believe that the All Ordinaries Index is bullish, technically it has traded lower over the past two weeks and is currently trading lower than the recent high set back on 9 June. Right now, we are still seeing a tug of war between the bulls and bears as the market is struggling to decide on a clear direction. I mentioned last week, that it would be wise to assume that the market may fall over the coming week or two and given how the market traded last week it is likely there is more downside to come. Given this, we need to be prepared for the down move to continue.

Right now, if the bulls are pulling back from buying, then the down move will be short in price and over in the next week or two. However, if the bears start to drive the market down, then we can expect a much bigger and longer move down in price. We also need to remember there is still a probability that the low in March may be tested, so once again, I recommend that investors exercise caution if buying and if the market does fall away be prepared to exit.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.