The investor‘s chief problem – and even his worst enemy – is likely to be himself. Benjamin Graham ―Security Analysis, 1934
2018 has been an absolute roller coaster for investors. After a shaky start to the year, the US stock market took off like a rocket ship. With most Irish investments and pension funds being heavily invested in the US markets, we all benefited from this growth. The S&P 500 hit an all time high on 20 September 2018. Over the next 95 days, the S&P fell -19.3%. Since Christmas Eve, markets have recovered 10%.
For the first time in a decade, there has been talk from investors of moving out of the market into cash to wait until the market recovers. By timing the market, investors plan on taking their gains and sitting in cash while the market falls. When they believe the market has reach the bottom, they will buy back in again…at a much lower price, and enjoy the massive gains that are usually enjoyed after a bear run.
If we decide we want to get out of the market, it’s best to do it when prices are high and we maximise our profit. We can agree that there’s no point in waiting until the prices have fallen and we are selling at a loss. We can also all agree that we cannot see into the future. So when do we decide to get out of the market? They say a market rises for 7-8 years before the next crash. Markets started to recover in April 2009, so that means you would have gotten out of the market sometime between April 2016-17. If you had gotten out early in April 2016, you would have missed out on 32% of growth. If you’d waited a year, you would have missed 7.6% of growth.
Or what about after new highs were earned in 2017? Surely that was a great time to get out? Records show that 80.50% of the time there are positive returns in the 12 month period after a record high is recorded.
History is littered with instances of where the market has bucked trends. That is because there is no pattern to follow. There are so many factors that effect a stock price; your own performance, your competitors performance, the general economy, the news, the weather. Looking for patterns or following your gut is nothing more than guess work.
So you’ve got out of the market and are waiting to get back in and make lots of money from cheap stock. But no one is going to ring a bell when we reach the bottom. Markets don’t go straight back up, so it’s impossible to know when the market is recovered. Just when we think of getting back into the market, there is another dip, so you hold off. As you are trying to time the market and avoid losses, you are going to be cautious with getting back into the market, so you will be slow to get back in.
In the 5 months since March 2009, there were the following falls:
But over that 5 month period, the S&P 500 grew by 31%. As someone who was trying to time the market and maximise their potential returns, it is likely that you would have missed that growth of 31%
If you try to time the market, you have to be lucky not once but twice. You need to get out of the market and back in at at the right time. Given there is no proven system or pattern to how markets react, you are relying on nothing more than being lucky.
When we invest our money, we know that the value of our money can go down as well as up. If you only wanted it to go up, you have to invest in cash but only expect the minimum return. If you want more, you have to take more investment risk. The degree of those ups and downs depends on the returns you need and your risk tolerance. If you are at a point where the market returns make you nervous and you are considering market timing, maybe it’s time for you to re-examine your overall investment strategy.
If you have any questions, send me an email to steven@bluewaterfp.ie